Are Banco Santander SA, Burberry Group plc and Merlin Entertainments plc the riskiest stocks in the FTSE 100?

Should you avoid these 3 stocks? Banco Santander SA (LON:BNC), Burberry Group plc (LON: BRBY) and Merlin Entertainments plc (LON: MERL).

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Shares in Santander (LSE: BNC) have slumped by 26% in the last year and the company’s future has become increasingly uncertain during that time. The main reason for this is the challenging economic outlook for Brazil and with this being a key market for Santander, it’s severely affecting the bank’s financial performance.

For example, Santander is expected to record a fall in its bottom line of 4% in the current year and this could cause its shares to come under greater pressure. As a result of this, it may appear as though Santander is a risky stock to own, but with it having a wide margin of safety it could prove to be an excellent long-term purchase.

In fact, Santander trades on a price-to-earnings (P/E) ratio of just 10.2 and this indicates that there’s significant upside potential. Therefore, while there’s some downside risk, Santander’s risk/reward ratio indicates it’s a buy at the present time, with a yield of 4.1% showing that it remains a solid income play too.

Out of fashion

Also perceived as being a risky stock to own at the moment is Burberry (LSE: BRBY). The fashion house is enduring a highly challenging period, with profit guidance being revised down due in part to weakness in China, which has become an important market for the business. And while in the long run China is likely to aid Burberry’s growth, in the short run it could cause the company’s financial outlook to come under a degree of pressure.

However, Burberry remains a very strong brand with a high degree of customer loyalty. With its bottom line expected to return to growth next year and a rise of 7% being pencilled-in, its prospects could improve rapidly in the coming years. Part of the reason for that is the pricing power Burberry has. Its considerable brand loyalty means that the company’s customers may be willing to pay a much higher price than they do at present, which could lead to higher margins and profit for Burberry in the long run.

Missing magic

Meanwhile, Merlin (LSE: MERL) has seen its share price slump by 5% since the turn of the year as it continues to suffer from reduced attendances at its Alton Towers theme park. This severely hit its most recent full year with its Resort theme parks revenue falling by 12.4% on a like-for-like (LFL) basis and causing a decline in EBITDA (earnings before interest, tax, depreciation and amortisation) of 4.3%.

Looking ahead, more disappointment could be on the cards since visitor numbers may remain suppressed following last year’s accident at Alton Towers. However, with Legoland performing relatively well, Merlin is expected to increase its bottom line by 16% this year and by a further 13% next year. This puts it on a price-to-earnings-growth (PEG) ratio of just 1.2, which indicates that its shares offer a wide margin of safety and could be worth buying for the long term.

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. The Motley Fool UK has recommended Burberry. 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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