Shares in Royal Mail (LSE: RMG) have made an excellent start to 2016. They’ve risen by 11% and part of the reason for this is the increased uncertainty among investors that has been a feature of the last few months. Although Royal Mail isn’t without risk, it offers arguably a more certain business model and investment prospects than many of its index peers. And with it having a beta of just 0.8, it should offer a less volatile shareholder experience too.
Looking ahead, Royal Mail could continue to be popular among investors since the outlook for the world economy is highly uncertain. And with it trading on a price-to-earnings (P/E) ratio of just 11.9, there appears to be at least 20% upside on offer over the medium term. Add to this a yield of 4.7% and Royal Mail’s total return could be hugely impressive in the coming years. Certainly, the outlook for letter delivery may be somewhat uncertain, but with Royal Mail’s European operations having significant growth potential, now could be a great time to invest.
Growth challenges
While Royal Mail has performed well this year, beverages company AG Barr (LSE: BAG) has been rather disappointing. Its shares have risen by just 1% year-to-date and looking ahead, there could be more lacklustre performance to come.
That’s because Barr has a rather unappealing mix of a high valuation and low growth prospects. For example, it’s forecast to increase its bottom line by just 1% this year and by a further 5% next year. That’s significantly lower than the wider index’s growth rate of mid-to-high single-digits and shows that while Barr has a relatively high degree of customer loyalty, its financial performance may fail to positively catalyse investor sentiment.
Furthermore, Barr trades on a P/E ratio of 17.9 and while this is lower than for some of its beverages sector peers, it remains rather high given its growth outlook. And with Barr having less diversity and a smaller product range than some of its consumer goods peers, there seem to be better opportunities to generate a 20%-plus return elsewhere.
Losses for now
Meanwhile, Circassia Pharmaceuticals (LSE: CIR) has recorded a share price fall of 18% since the turn of the year. Clearly, Circassia has a bright long-term future since it has a healthy pipeline of new treatments and if news flow on their development is positive, its shares could rise by over 20% in the medium term.
However, with Circassia forecast to be lossmaking in both the current year and next year, there may be better risk/reward opportunities elsewhere within the healthcare space. That’s not to say that Circassia should be completely avoided by less risk-averse investors, but rather that other stocks within the FTSE 350 offer rising profitability at a reasonable price and so the prospects for a 20%-plus return elsewhere may be higher.
