Share prices are never cheap without reason. Indeed, the idea of buying low in order to maximise profit comes with a fair amount of risk. If a company?s performance was strong, its shares would not be cheap. Similarly, if the macroeconomic outlook was rosy, share indices would be at all-time highs.
However, just because shares are cheap does not necessarily mean they are to be avoided. Sometimes they can turn out to be the most profitable investments around. With that in mind, here are…
Share prices are never cheap without reason. Indeed, the idea of buying low in order to maximise profit comes with a fair amount of risk. If a company’s performance was strong, its shares would not be cheap. Similarly, if the macroeconomic outlook was rosy, share indices would be at all-time highs.
However, just because shares are cheap does not necessarily mean they are to be avoided. Sometimes they can turn out to be the most profitable investments around. With that in mind, here are two unloved stocks that could turn out to be your best performers in the long run.
Recent news flow on BP (LSE: BP) (NYSE: BP.US) has sent the company’s share price lower, with a US federal judge deciding that the company was grossly negligent in the 2010 Deepwater Horizon oil spill. This could end up costing BP up to $18 billion in pollution fines. In addition, sanctions against Russia could also impinge on future profitability, which together means that investor sentiment is very weak at present.
However, BP could still be well worth buying. Certainly, its outlook seems pretty black at the moment, but the company could still enjoy a prosperous long-term future. That’s because, despite shedding a number of high-quality assets in recent years, BP continues to have an asset base that is stuffed full of highly lucrative and potentially profitable prospects. For example, in 2015 the company is expected to increase its bottom line by as much as 8%, which highlights the potential (even in the short run) of BP moving forward.
Furthermore, BP is generous with regards to sharing profitability with investors. It currently pays out 49% of profit as a dividend, which means that shares in the company currently yield a highly impressive 5.1%. With shares in BP trading on a price to earnings (P/E) ratio of just 9.6, there seems to be upwards rerating potential as well as enticing income and earnings growth prospects, too.
With continued allegations of wrongdoing surrounding its dark pool trading system, Barclays (LSE: BARC) (NYSE: BCS.US) is not a favourite among investors at the moment. Indeed, shares in the bank have fallen by 18% since the turn of the year, which is well below the FTSE 100’s gain of 1% over the same time period.
However, the long term holds huge potential for Barclays. It is forecast to increase its bottom line by 28% in the current year and by a further 26% next year. This means that its earnings are forecast to be 61% higher in 2015 than they were in 2013, which is a stunning rate of growth. Furthermore, at least some of this growth is due to be shared with investors, as dividends per share are expected to increase by 40% next year. At its current share price, this means that Barclays currently yields an impressive 4.4% based on next year’s anticipated dividend.
With shares in the bank currently trading on a P/E of just 10.4, it continues to offer a potent mix of income potential, earnings growth and the scope for an upwards rerating. As a result, it could be a star performer.
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Peter Stephens owns shares of Barclays and BP. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.