4 Stocks With 20%+ Upside: Centrica PLC, Royal Bank Of Scotland Group plc, RSA Insurance Group plc And Petrofac Limited


Although Centrica’s (LSE: CNA) share price has risen by 7% since the General Election, the gain is perhaps not as much as was expected given that the Tories won a majority. That’s because Centrica’s share price had been held back considerably by the threat of a price freeze under an Ed Miliband-led government, with the possibility of a tough new regulator also causing investor sentiment to decline.

As such, there appears to be significant scope for an upward rerating moving forward – especially since Centrica trades on a price to earnings (P/E) ratio of 15.4 versus 16 for the index. And, with it yielding 4.3% at the present time and being expected to increase dividends by 3% next year, it remains a very appealing income play that could see investor sentiment pick up now that it has a new management team and a more stable operating environment.


The operating environment for banks such as RBS (LSE: RBS), meanwhile, continues to be highly favourable. That’s because low interest rates mean a rise in demand for new loans, while defaults on existing loans fall as a loose monetary policy stimulates the economy and interest charges are reduced. As such, RBS is set to move to a highly profitable position this year, with pretax profit of £1.2bn forecast at the present time.

Despite this, RBS continues to trade on a very low valuation. For example, it has a price to book (P/B) ratio of just 0.68 and this shows that its shares could rise by a significant amount and still be considered cheap. In fact, a 20% share price gain would still mean that RBS has a P/B ratio of only 0.82, which would remain difficult to justify now that the bank’s bottom line is very much back in the black.


It seems as though the market is waiting for a catalyst to push RSA’s (LSE: RSA) share price higher. After all, investors have not had much to shout about in recent months, with it making a loss last year and seeing support for its senior management remuneration plans take a hit. As such, shares in RSA have fallen by 1% this year against a FTSE 100 which is already up 7%.

However, RSA is forecast to return to profitability this year and then grow its bottom line by 8% next year. That’s an impressive rate of growth and means that RSA’s current P/E ratio of 13.9 is tough to justify – especially when the FTSE 100 has a P/E ratio of 16 and offers growth in the mid to high single digits. As such, an increase in RSA’s P/E ratio to 16.7 seems very achievable – especially when its turnaround plan is still in its infancy and, as many of its insurance peers have shown, double-digit growth rates are a very real goal.


Clearly, the future for Petrofac (LSE: PFC) is highly correlated to the price of oil. That’s because the company depends on a buoyant oil sector that is continually investing and, with the oil price and profitability at oil majors on the decline, Petrofac’s earnings are taking a hit.

And, while the consensus among industry experts is for further weakness in the price of oil, the reality is that its direction is impossible to predict. As such, stocks such as Petrofac are currently offering excellent value for money as the market prices in further challenges ahead. Therefore, a gain of 20% appears to be very possible, with Petrofac’s forward P/E ratio of 8.4 indicating that its shares are hugely cheap at their current price level.

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Peter Stephens owns shares of Centrica, RBS, RSA and Petrofac. The Motley Fool has recommended shares of Centrica and owns shares of Petrofac.