J Sainsbury (LSE: SBRY) has seen its share price fall by 12% in the first half of 2014, with continued pressure among supermarkets causing like-for-like sales growth to stutter. However, shares in the UK-focused supermarket are now trading on a price to earnings (P/E) ratio of just 10.9, which compares favourably to the FTSE 100‘s P/E of 14.2. Indeed, even if earnings growth is minimal over the short to medium term, there is potential for a narrowing of the current valuation gap between J Sainsbury and the FTSE 100, which could see shares make significant gains.
When over 90% of your profits are dependent upon iron ore, you’re bound to suffer when demand for that metal weakens. That’s been the case at Rio Tinto (LSE: RIO), where earnings have been squeezed in recent years. However, the future looks much brighter and Rio Tinto is forecast to deliver earnings growth of 11% next year. This is above the FTSE 100 average of mid-single digit growth, but where Rio Tinto really shines is with regard to its valuation. It trades on a P/E of just 10.6, thereby highlighting the great value that shares offer at current levels.
The tobacco industry has enjoyed a strengthening of investor sentiment over the last year, with stocks such as Imperial Tobacco (LSE: IMT) gaining 18% in the last year alone. That’s at least partly because of the vast potential that game changing E-Cigarettes present, with Imperial Tobacco being one of the tobacco companies that is taking the popularity of the smokeless tobacco technology seriously. As well as this long-term potential, Imperial Tobacco offers a great yield of 4.7% and a P/E of 13.2, which shows there is still more upside potential.
Trading on a P/E of 13.1, BT (LSE: BT.A) seems to offer good value at current levels. However, what really impresses about BT is its track record of earnings growth. Indeed, it has delivered earnings per share (EPS) growth in each of the last five years, with it averaging 12% over the period. Furthermore, it is set to increase EPS by 6% this year and 8% next year and, importantly, has the long term potential to gain further exposure to the lucrative pay-TV market.
Certainly, Tesco (LSE: TSCO) is experiencing more difficulties at present than perhaps it ever has. However, the current valuation appears to price in a long period of low growth that may not materialise. For instance, Tesco’s P/E is just 11.1 and, perhaps of more relevance, its price to book ratio is just 1.6. This shows that Tesco is very cheap and if it can muster even a mild improvement from its current performance then shares could show gains. Ultimately, tastes are likely to change away from discount stores (especially if the UK economy keeps showing strength) and towards higher quality goods, which could help Tesco improve its bottom-line.
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Peter owns shares in J Sainsbury and Tesco. The Motley Fool owns shares in Tesco.