While the FTSE 100 could offer high returns in the long run, a number of shares have the potential to outperform it. Here are three stocks that appear to offer favourable risk/reward ratios and could therefore help you to retire early.
Improving performance
Reporting on Wednesday was precious metals mining company Gem Diamonds (LSE: GEMD). Its half-year performance was relatively strong, with revenue rising by 81% to $167.7m, while underlying EBITDA (earnings before interest, tax, depreciation and amortisation) increased from $13m last year to $68.4m in the first half of the current year.
The company has experienced relatively strong operating conditions. Its business transformation is also moving along as planned, and this is expected to contribute to a rise in earnings of 280% in the current financial year. Although its medium-term prospects may be volatile, Gem Diamonds’ price-to-earnings (P/E) ratio of 6 suggests that it offers good value for money and may therefore be able to deliver capital growth.
The company has scope to further improve its productivity and efficiency over the next few years. Together with the potential for strong global economic growth, this could lead to an impressive financial performance over the medium term.
Income opportunity
The income investing potential of Rio Tinto (LSE: RIO) continues to be relatively impressive. The company has enjoyed robust demand for iron ore in recent years, with stable demand from China being a major part of its improved financial performance. With the world economy performing well and Chinese demand for steel continuing to be high, this trend may continue over the next few years.
Rio Tinto’s dividend yield of 5.9% indicates that as well as a high income return, the stock may be undervalued. It continues to have a competitive advantage versus peers when it comes to costs, and this could provide it with greater resilience should operating conditions change.
With the company’s dividend being covered around 1.7 times by profit, it seems to have a sustainable income outlook even if iron ore prices fall. And with a P/E ratio of around 11, it appears to offer a wide margin of safety.
Improving business
The performance of Anglo American (LSE: AAL) could also be relatively impressive over the long run. The company has been able to restructure in recent years, with asset disposals helping it to concentrate on core operations. Alongside productivity and efficiency improvements, this has helped the company to deliver stronger financial performance in the last couple of years.
Clearly, there are risks ahead for Anglo American and its sector peers. The stronger US dollar could cause weaker demand for a range of commodities, and this could hurt investor sentiment. But with the stock having a P/E ratio of around 10, it seems to offer excellent value for money when its diversity and improved financial standing is considered.
While not the most stable stock in the index, the company appears to offer a sound risk/reward ratio. As such, it could be worth buying now for the long term.
