With the FTSE 100 having fallen by 9% in the last six months, a number of stocks are now trading at discounted prices. Certainly, there is scope for the price level of the UK’s main index and its constituents to fall further, but for long term investors it now appears to offer considerable upside potential in 2016 and beyond.
It’ll take time
One company which has posted greater share price falls than most is Tesco (LSE: TSCO). Its shares are down by 18% in the last six months and a key reason for this is a realisation by the market that the company’s turnaround plan is going to take time to have a positive impact. While earlier in the year investors became rather excited about all of the changes being made at Tesco, such as selling off non-core assets, generating efficiencies and cutting back on high cost/low return activities (such as 24 opening in some stores), the reality is that the company’s prospects remain challenging in the short run.
A key reason for this is the high level of competition within the supermarket space, although in future the present price war may begin to fade. That’s because shoppers are becoming less price conscious as disposable incomes increase in real terms, which means that they may be willing to pay more for improved customer service and a wider choice of goods. Clearly, an improving economy will take time to have a positive impact on Tesco’s sales and profitability, but with a price to earnings growth (PEG) ratio of 0.3 now seems to be a good time to buy.
Hugely overpriced
Unlike Tesco, ABF (LSE: ABF) has posted a rise in its share price in the last six months.It’s increased by 19% as the company’s Primark division, in particular, has delivered relatively upbeat performance, although in the current year ABF’s bottom line is forecast to fall by 5% before rising by 4% next year.
This may be in-line with market expectations, but it still represents a disappointing performance at a time when a number of consumer and retail stocks are posting index-beating profit growth. And, with ABF having a yield of just 1%, it continues to be a very poor income play. In fact very few FTSE 100 stocks offer a lower yield at the present time.
Looking ahead, ABF’s shares could come under pressure since the company trades on a PEG ratio of 8.1. This indicates that it is hugely overpriced and, although it has defensive merits, other defensive stocks such as utilities are available at much lower prices, with better yields and equivalent near-term growth prospects.
Superb potential
Meanwhile, Reckitt Benckiser (LSE: RB) continues to offer superb long term growth potential. And, while China’s slowing GDP growth rate is a cause for concern, the reality is that the number of middle-income earners in China is forecast to rapidly expand in the coming years, thereby providing Reckitt Benckiser with a clear path to above average profit growth in the medium to long term.
Despite this, Reckitt Benckiser may be worth watching rather than buying at the present time. That’s because, after share price growth of 277% in the last decade, it now trades on a price to earnings (P/E) ratio of 26.2, which is higher than many of its global consumer peers.
And, while earnings growth is due to pick up next year following three disappointing years, Reckitt Benckiser’s PEG ratio of 3.5 still lacks appeal on a relative basis. So whilst it is a top quality company, investors may wish to await a pull-back before buying a slice of the business.
