Will GlaxoSmithKline plc And Burberry Group plc Beat The FTSE 100 In 2016?

Should you buy these 2 stocks right now? GlaxoSmithKline plc (LON: GSK) and Burberry Group plc (LON: BRBY)

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Although 2015 has been a rather disappointing year for GlaxoSmithKline (LSE: GSK), with its shares falling by 6% year-to-date, it has still managed to beat the FTSE 100. That’s because the wider index is down by 9% and looking ahead to next year, further outperformance of the index seems relatively likely.

That’s because GlaxoSmithKline’s earnings are relatively defensive which, at a time when there’s a great deal of uncertainty surrounding US interest rate rises and the Chinese economic slowdown, is highly appealing to investors. As such, it would be of little surprise if demand for the company’s shares increased during the course of 2016 – especially since they offer such appealing value for money.

Fair price

GlaxoSmithKline now trades on a price-to-earnings (P/E) ratio of just 17 which, for a company that has an excellent and well-diversified pipeline of new treatments, seems to be a very fair price to pay. That’s especially the case since GlaxoSmithKline is forecast to increase its bottom line by 11% next year. And looking further ahead, a major cost saving operation has the potential to improve margins at a time when new drugs offer the prospect of increased sales.

Clearly, GlaxoSmithKline has been a poor performer for a number of years. While it has beaten the FTSE 100 this year, it has still wiped out its income return to give a total return of zero for the full year. However, in 2016 and beyond, a 6%-plus yield, as well as a reasonable valuation, growth potential and a relatively defensive earnings profile mean that the company looks set to fully recover and post stunning total returns.

Out of fashion

Meanwhile, Burberry (LSE: BRBY) has dramatically failed to beat the wider index in 2015 with its shares declining by 29% since the turn of the year. A key reason for this is a slowdown in China, which has been a key market for Burberry in recent years. Due to the slowdown, Burberry’s earnings are set to fall by 6% in the current year and rise by just 5% next year.

As a result of the rather disappointing near-term outlook for its bottom line, Burberry may struggle to beat the wider index in the early part of 2016. With no obvious catalyst, its P/E ratio of 14.9 could come under a degree of pressure. However, in the long run Burberry remains a very appealing business with an exceptionally strong brand, the potential for pricing improvements, as well as a still-strong long term growth story in China.

In fact, as the Chinese economy becomes increasingly consumer-focused, Burberry could stand to gain, which makes now an excellent opportunity to buy-in at a relatively low price for upbeat long-term growth prospects. And with a number of other global consumer goods companies trading on much higher valuations, Burberry has high relative, as well as absolute, appeal for 2016 and beyond.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Burberry and GlaxoSmithKline. The Motley Fool UK has recommended Burberry and GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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