3 market leaders that could rebound strongly

Paul Summers picks out three companies that could be excellent contrarian buys.

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Buying top quality companies on temporarily depressed share prices can be an effective strategy for building wealth over the medium-to-long term. This makes even more sense when those businesses are leaders in their respective markets.  

With this in mind, here are three potentially very profitable opportunities for patient contrarian investors.

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Golden opportunities?

Shares in temporary power provider, Aggreko (LSE: AGK) fell sharply last week after the company reported a 3% fall in revenue (to £1.5bn) and 24% slump in pre-tax profits after exceptional items (£172m) in 2016. Most of this can be attributed to last year’s weak oil price, problems with contracts in Argentina and the company’s decision to pull out of bidding to supply power for the Rio Olympics.

Although stating that it expected to see growth in 2017, CEO Chris Weston added that the company’s cost savings of £25m from the second half would be “more than offset” by its problems in South America. Full-year pre-tax profits in 2017 would therefore be lower than the year before.

Despite these problems, Aggreko boasts a consistent history of generating good returns on capital it invests. A resurgence in the fortunes of emerging markets and a gradual recovery in the oil price, when combined with its recent contract win to provide temporary electricity for the 2018 Winter Olympic Games, should see a revival of the share price. In the meantime, the company expects its Europe and Australia Pacific businesses to continue to perform well throughout 2017. 

Trading on a price-to-earnings (P/E) ratio of 15 with a 3% yield, I think the shares warrant consideration.  

Another market leader that’s had an awful few months is spread betting firm IG Group (LSE: IG). Back in December, the Financial Conduct Authority (FCA) announced a plan to implement new rules to raise standards across the industry, including requiring active customers to have more money in their accounts and prohibiting bonus promotions. Swiftly assuming that profits at firms such as IG would suffer, the market’s reaction was unequivocal. Cue a 40% fall in the shares.

Thanks to the prevailing uncertainty, shares in IG continue to trade on an appealing valuation (11 times earnings for 2017) and come with a 6.2% forecast yield. If the FCA backtracks even slightly from proposed new rules and/or takes on ideas suggested by those operating in the field, expect a strong rebound in the share price. Even if it doesn’t, the new rules could bring about consolidation in the industry and the removal of smaller competitors — a situation which could be beneficial for IG and its investors.  

Overdone Pizza?

A final option is Domino’s Pizza (LSE: DOM). Stock in the Milton Keynes-based business dipped over 13% last Thursday after revealing that a downward trend in trading — highlighted in Q3 — had continued into the first nine weeks of 2017.

I think this reaction was overdone, particularly as sales in the UK still rose a very respectable 14% in 2016. Serving up 94m pizzas, Domino’s also managed to generate a higher-than-expected 17% rise in pre-tax profit to just under £86m. With online sales jumping 21% in just one year and plans to open another 80 stores in the UK in 2017, I suspect that recent lacklustre business is simply a temporary blip.  

Indeed, given that Domino’s shares have rarely been cheap to acquire, I think investors have now been presented with a compelling opportunity to grab a slice of the FTSE 250 constituent.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Domino's Pizza. 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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