2 bargain stocks in which I’d invest £1,000

These two shares could offer growth at a reasonable price.

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the prospects for the global economy being generally upbeat, many companies are forecast to post improving levels of profitability over the next couple of years. As such, their valuations have often risen to levels which reduces their investment potential. Narrow margins of safety could mean that the risk/reward ratio is no longer in an investor’s favour for many stocks.

However, within the industrial sector there continue to be some strong growth opportunities which still trade on low valuations. Here are two prime examples which could be worth investing in today.

Improving performance

Reporting on Tuesday was Melrose Industries (LSE: MRO). The company’s 2017 financial year was relatively successful, with the performance of Nortek being strong. It was able to deliver revenue growth of 2%, with increased momentum in the second half of the year. Operating profit was up 52% on the prior year, and is up 67% on the last full year prior to its acquisition.

Of course, significant restructuring costs were incurred in the first full year of Nortek ownership by Melrose. However, the company’s long term future appears to be positive. So too does that of another of Melrose’s businesses, Brush. Consultations with employees have commenced, with the view to putting in place a restructuring plan.

Looking ahead, Melrose is forecast to post a rise in its bottom line of 4% this year, followed by further growth of 14% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.4, which suggests that it could offer a high rate of return. With the company having a proven business model, its performance could improve in future years as it continues to execute its growth strategy.

Turnaround potential

Also operating in the industrials sector is automotive specialist GKN (LSE: GKN). The company has been the target of an unsolicited approach by Melrose, which it has sought to fight off. GKN believes it is well-placed to deliver a successful turnaround, and that it is putting in place the right strategy to do so.

Looking ahead, the market consensus suggests that this is the case. It is due to report a rise in earnings of 13% this year, followed by further growth of 11% next year. This puts the company’s shares on a PEG ratio of 1.1, which indicates that they are undervalued at the present time. Certainly, there is a risk that the company will be unable to effect a successful turnaround, but this seems to have been factored into its valuation.

While there is the potential for a combination between Melrose and GKN, it seems unlikely to happen at the present time. Of course, this may change in future and it could mean that investors in both companies end up with one slice of the merged group. However, with the companies being fairly well-diversified, they are likely to offer favourable risk/reward ratios in the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares in GKN. The Motley Fool UK owns shares of GKN and Melrose. 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

1 giant red flag for Diageo shares!

As an investor in Diageo shares, I'm increasingly worried about one unstoppable generational trend that could reduce sales in future.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Billionaire David Tepper has doubled down on these incredibly cheap shares

This top Wall Street fund manager is known for targeting dirt cheap shares in the stock market. What was he…

Read more »

Investing Articles

Down 23%, are Greggs shares a long-term bargain?

Christopher Ruane slices into some possible pros and cons of buying Greggs shares for his portfolio after they slid by…

Read more »

Investing Articles

This boring FTSE 250 stock has an incredible earnings forecast!

This FTSE 250 stock has moved sideways for years. It certainly hasn’t rewarded shareholders. However, things could change in the…

Read more »

Investing Articles

Make or break: could US trade tariffs hurt the UK stock market?

Mark Hartley examines the knock-on effect that Trump tariffs could have on the UK stock market and considers a stock…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

I don’t care if my passive income stock Phoenix Group doesn’t rise this year – I’ve got the 10.1% yield!

A firm’s yield moves in the opposite direction to its share price, so with my core passive income holdings I…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Vodafone’s share price is down 13% to 69p despite promising Q3 results, so it is an unmissable bargain for me?

Vodafone lost ground after its recent results, but they seemed promising to me, which leaves the share price looking significantly…

Read more »

Buffett at the BRK AGM
Investing Articles

Is Warren Buffett right about this 1 thing when it comes to Lloyds shares?

With the words of Warren Buffett ringing in his ears, our writer considers whether the Lloyds share price will do…

Read more »