In order to make serious capital gains on shares, history tells us that the time to buy is at the bottom. Clearly, this means taking on a substantial amount of risk since no stock or stock market ever trades at a low point when the outlook is bright and upbeat. Buying at what appears to be the bottom can lead to short term losses, high volatility and a lot of sleepless nights.
High quality, low valuation
This appears to be the current situation in the resources sector, with a number of high quality companies in this space trading on relatively low valuations. For example, Amec Foster Wheeler (LSE: AMFW) has a forward price-to-earnings (P/E) ratio of just 6.6, with this figure taking into account the forecast fall in earnings of 27% in the current financial year.
Looking ahead to next year, Amec Foster Wheeler’s net profit is due to flatline. While it would be a disappointing result compared to the wider index’s growth rate, it could positively catalyse investor sentiment in the company as investors see that the current year’s declines in profitability aren’t repeated. As such, the company’s shares could benefit from an upward rerating, with them having an exceptionally wide margin of safety at the present time.
Furthermore, Amec Foster Wheeler is increasing its cost saving targets. As highlighted in its recent update, it’ s responding to the cutbacks in capex across the resources industry and, while these are set to continue, it remains well-positioned to not only survive the present challenges, but also offer impressive capital gains over the long run.
Long term buy
Similarly, BP (LSE: BP) also appears to be a strong long term buy at the present time. Its shares trade on a price-to-book value (P/B) ratio of just 0.88 and as such, seem to offer considerable upside.
Clearly, BP’s future is closely linked to the price of oil, and in the short term the price of black gold could sink further. That’s because the supply glut that’s keeping prices on a downward trend is showing little sign of abating, with the price of oil falling heavily since OPEC members failed to agree on a supply ceiling at their recent meeting. This, plus weakening demand, could leave many investors feeling as though oil is a bad investment at the present time.
While this may be the case in the short run, longer term world energy use is set to increase by 56% between 2010 and 2040. Clearly, this is a very long term horizon, but it indicates that the current predicament for oil is unlikely to be a permanent feature of the energy market. Certainly, renewables will make up a greater proportion of the energy mix, but oil and other fossil fuels are still set to represent 80% of global energy use by 2040.
So while BP is struggling to cope with a low oil price at the present time, its valuation and long term growth prospects remain very sound. For investors who can buy, wait and not worry about short term volatility, it seems to be a very enticing purchase for 2016 and beyond.
