When buying shares in companies which have delivered disappointing share price performance, seeking a wide margin of safety is crucial. Not only does it provide a lower risk profile for an investor, it also means that the potential rewards on offer may be high. Certainly, there is scope for continued volatility and disappointment with any recovery stock in the near term. But in the long run they can perform exceptionally well. Here are two shares which seem to offer stunning long-term growth potential.
Positive update
Reporting on Tuesday was oil and gas producer Nostrum (LSE: NOG). The company’s half-year results showed it is making progress with its strategy. Revenue increased from $163.5m in the first half of 2016 to $210m in the same period of the current year. Its net operating cash flow of $118.5m was a major improvement on the $78.9m from the prior year. Its transport per barrel of oil equivalent cost was further cut to $5 from $5.30 last year, which shows the business has the potential to become increasingly efficient over the medium term.
Nostrum’s average daily production for the six-month period was 46,685 barrels of oil equivalent. It has been able to deliver a successful new bond issuance, while its construction of the third Gas Treatment Unity continues to be in line with guidance. This is due to complete before the end of 2017.
With Nostrum having recorded a share price fall of 24% in the last three months, it has clearly been a difficult period for the company’s investors. Looking ahead, more volatility could be present due to the uncertainty regarding the oil price. However, with the company performing well from an operational standpoint, it could produce high capital returns. That’s especially the case since it trades on a price-to-earnings growth (PEG) ratio of just 0.1. This suggests a wide margin of safety is currently on offer.
Encouraging outlook
Also posting significant losses for investors in the last three months has been pharmaceutical company Shire (LSE: SHP). Its news flow has been somewhat disappointing and management changes seem to have affected investor sentiment to at least some degree. In the short run, there is the potential for further volatility in the company’s share price. However, in the long run its tie-up with Baxalta could lead to a more profitable business which is worthy of a considerably higher valuation.
Next year, Shire is forecast to report a rise in its bottom line of 9%. Since it trades on a price-to-earnings (P/E) ratio of just 9.8, this means it has a price-to-earnings growth (PEG) ratio of only 1.1. As such, there is obvious scope for an upward re-rating. Given the strength of its pipeline and the potential synergies from the recent merger, its overall outlook is relatively positive. Within an industry which may become more important among investors due to its low positive correlation to the wider economy, now could be the perfect time to buy Shire.
