While the FTSE 100 may be trading close to a record high after its gains in recent months, some stocks continue to offer wide margins of safety. Certainly, they may have relatively uncertain outlooks. But with profit growth being robust in many cases, they could outperform the wider index over the medium term.
Here are two prime examples of such companies. They appear to offer strong growth potential within an industry that could benefit from a tailwind in future years. As such, they could be worth a closer look.
Improving performance
Reporting on Wednesday was UK homebuilder and regeneration specialist Countryside (LSE: CSP). Its full-year results showed a strong year of growth, with a 28% increase in completions and a 32% rise in revenue. The company’s reservation rate increased to 0.84 from 0.78 in the prior year, with a private average selling price of £430,000. Although the selling price was down on the previous year, this was in line with its strategic objectives. Overall, house price inflation of 5% shows that the housing market remains buoyant.
The company reported robust trading, with strong demand from owner occupiers. A record year-end forward order book of £242.4m shows that the company’s prospects appear to be bright. In fact, its bottom line is forecast to rise by 24% in the current financial year. This would be a sound performance in a growing sector.
Despite this, the stock trades on a price-to-earnings (P/E) ratio of just 9.9. This suggests that investors remain unsure about the outlook for the UK economy and for the housebuilding sector. For investors who can tie up capital for the long term, there could be a buying opportunity on offer.
Growth potential
Also offering upside potential within the housebuilding sector is Taylor Wimpey (LSE: TW). The company has enjoyed a prosperous 2017 thus far, with its shares rising by 27% since the start of the year. However, they continue to offer a wide margin of safety. For example, the stock trades on a P/E ratio of around 10 despite an upbeat growth outlook. In the current year it is expected to record a rise in its bottom line of 7%, followed by further growth of 9% next year.
Clearly, the UK economy faces an uncertain period. So far though, the housing market has remained robust and this may be because of demand-side policies such as Help to Buy. An extension of the government policy could lead to buoyant demand for new homes, while the scale of imbalance between demand and supply means that even a major housebuilding programme is unlikely to reduce the supply deficit in the medium term.
Therefore, Taylor Wimpey looks to have a bright future ahead of it. Certainly, volatility may be high as government policies change and Brexit edges closer. But with a low valuation and high growth potential, it could be worth buying and holding for the next decade.
