The outlook for buy-to-let continues to be highly challenging. The prospect of interest rate rises, high price-to-earnings ratios across the UK, and an uncertain economy all mean that the capital growth of recent decades may be coming to an end.
In contrast, FTSE 100 shares such as Marks & Spencer (LSE: MKS) may now offer good value for money. Certainly there are risks facing the retailer, but a low valuation may factor them in.
Therefore, it could be worth buying alongside another stock which appears to also offer a low valuation and that reported an encouraging update on Wednesday.
Improving prospects
The stock in question is energy procurement consultant Inspired Energy (LSE: INSE). Its trading update showed revenue for the 2018 financial year is expected to be 21% ahead of the previous year. Its core Corporate Division recorded sales growth of 29% and contributed 84% of group revenue. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be 24% up on the previous year, with trading having been strong throughout the year.
The company also reported that the strong momentum of 2018 has continued into 2019. It’s on track to deliver a rise in earnings of 7% this year, which suggests its recent acquisitions are performing well. With scope for further M&A activity, the business could generate an improving financial performance.
Since Inspired Energy trades on a price-to-earnings (P/E) ratio of around 10, it seems to offer good value for money too. With an improving profit outlook, it could be a strong performer over the long term.
Changing business
As mentioned, the Marks & Spencer share price could offer good value for money. Even though investor sentiment has picked up since the start of the year, it continues to trade on a P/E ratio of just 11.3. This suggests investors may have factored in challenges, such as weak consumer confidence and Brexit risks, with the changes being made by the company having the potential to boost its financial performance in the coming years.
For example, M&S is expected to move into the online grocery segment. This could improve its omnichannel capabilities, while investment in the fundamental parts of its business could lead to a stronger competitive advantage versus industry peers. And with it changing its pricing structure to focus on everyday low prices rather than one-off deals, it could generate improving sales growth over the medium term.
While the stock may have an uncertain future, so too does buy-to-let. And with property prices compared to incomes being at their highest ever level, there seems to be limited scope for further significant capital growth – especially with interest rates due to rise over the next few years. In contrast, Marks & Spencer could become a strong recovery stock under what appears to be a sound growth strategy.
