2 opportunities to beat the FTSE 100 which won’t last forever

These two stocks could help you to generate higher returns than the FTSE 100 (INDEXFTSE:UKX).

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Beating the FTSE 100 over a long period is never an easy task. Certainly, it is very possible to do so over a short-term timeframe, but to do so consistently requires skill and an ability to remain disciplined in a variety of market conditions.

At the present time, many stocks are trading at record highs after a period of strong performance. The index is close to breaking through a new record, and this means that there may be a lack of value in many parts of the market. However, here are two stocks which have fallen in recent months and that could therefore offer a wide margin of safety for the long run.

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Improving outlook

Reporting on Tuesday was veterinary pharmaceuticals specialist Dechra (LSE: DPH). The company’s performance in the first half of its financial year has been in line with management expectations. Reported revenue increased by 10.5% at constant exchange rates, with its European Pharmaceuticals revenue growth being 5.5% at constant currency. In North America, its Pharmaceuticals revenue growth was 20% at constant currency, while it was able to complete the bolt-on acquisition of RxVet Limited.

In the last three months the share price of Dechra has fallen around 7%. That’s despite the company continuing to offer an upbeat earnings growth outlook. It is forecast to post a rise in its bottom line of 12% in the current financial year. At a time when a number of pharmaceutical majors are struggling to post above-average earnings growth figures, this could appeal to investors and help to drive the company’s share price higher.

Dechra also has a solid track record of earnings growth. The company has been able to grow its net profit at an annualised rate of 25% during the last five years. This shows that it may offer high and consistent performance in the long run.

Potential turnaround

Also seeing its share price fall in recent months has been oil and gas support services company Petrofac (LSE: PFC). Its shares are down 44% in the last year due in part to the impact of the SFO (Serious Fraud Office) investigation into the company. This has been ongoing for many months and has caused investors to remain cautious about the future prospects for the business.

However, after its share price fall, Petrofac now appears to offer a wide margin of safety. It has a price-to-earnings (P/E) ratio of around 9.4, which suggests that the stock market has priced-in potential difficulties for the business. And with a dividend yield of 5.2% which is covered 2.1 times by profit, the prospects for a high total return seem significant.

Certainly, the stock is relatively high-risk. The SFO investigation could cause further falls in its share price, while continued difficulties in the oil and gas industry may do likewise. However, with such a low valuation, it could also offer high rewards in the long run.

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Peter Stephens owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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