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

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »