With the FTSE 100 having fallen by over 600 points in less than three months, many investors are becoming more interested in buying high quality stocks for the long haul. And, while the index may fall further in the short run if the Greek debt crisis talks deteriorate further, in the long run the FTSE 100 is likely to move considerably higher than its current level.
Of course, a major challenge for many investors intent on buying shares is which ones have the best mix of good value and bright futures. On this front, the likes of Centrica (LSE: CNA) and BAE Systems (LSE: BA) hold considerable appeal, since they have both endured challenging recent periods that make their shares much cheaper than they perhaps otherwise would be.
For example, Centrica has been hurt by a lower oil price, with profitability at its exploration and production arm coming under pressure, while BAE has suffered from cuts to defence spending across the developed world. As a result, their shares trade on price to earnings (P/E) ratios of just 14.5 and 11.8 respectively; both of which indicate considerable potential for an upward rerating over the medium term.
Furthermore, both Centrica and BAE are forecast to post respectable earnings growth figures next year and they could act as a positive catalyst on the companies’ share prices by showing investors that they are returning to improved financial performance. And, with the two stocks both currently yielding 4.6%, they look set to provide a generous income for their investors in the meantime and, looking ahead, this could boost investor sentiment further if, as expected, interest rates remain at historic lows for the next year or two.
Meanwhile, the FTSE 100 also contains stocks that offer much stronger growth potential than BAE or Centrica. For example, advertising giant, WPP (LSE: WPP), and wealth management provider, St. James’s Place (LSE: STJ), are both expected to easily beat the wider index when it comes to growth potential. In fact, WPP is forecast to post bottom line growth of 9% in the current year, followed by growth of 10% next year, while St. James’s Place is due to deliver net profit growth of as much as 24% next year.
Despite their strong forecast growth rates, both companies trade on very appealing valuations. For example, WPP has a price to earnings growth (PEG) ratio of just 1.4, while St. James’s Place has a PEG ratio of only 0.9. Both of these figures indicate that growth is on offer at a very reasonable price and that their shares could continue the runs that have seen them soar by 130% (WPP) and 325% (St. James’s Place) in the last five years.
So, while the near-term outlook for the FTSE 100 is very uncertain, the likes of Centrica, BAE, WPP and St. James’s Place appear to be well-worth buying for the long term – especially if you can live with a degree of volatility in the weeks and months ahead.
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Peter Stephens owns shares of BAE Systems and Centrica. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.