Which Recovery Stock Will Make You Rich: Royal Bank of Scotland Group plc, Aviva plc Or Rolls-Royce Holding PLC?

FTSE 100 stocks Royal Bank of Scotland (LSE: RBS), Aviva (LSE: AV) and Rolls-Royce (LSE: RR) all plainly have big recovery potential. But which of the three could be the best bet for investors today?

Not convinced

All the big Footsie banks were hammered by the 2008/9 financial crisis, but RBS’s fall from grace was the most spectacular. A record loss for a British company of £24bn and a £46bn bail-out by the government just about says it all.

Of course, recovering from such a disaster takes time. Initial market optimism that pushed RBS’s shares up to a post-crisis high of over £5.50 didn’t last, and the shares are currently changing hands for less than £3.50. The business has made progress, even if the share price hasn’t, but the road hasn’t been smooth and there’s still a long way to go: you’ll come across the year 2020 in all kinds of targets for the bank.

RBS’s shares are currently trading at a price-to-tangible net asset value of 0.9, compared with 1.5 for Lloyds, which would indicate a 67% potential upside. However, the government’s stake in Lloyds is down to 14%, while it’s expected to take until at least 2020 for the government to reduce its holding in RBS to that kind of level from a current 73%. As such, I’m not convinced RBS offers the best potential gains for investors today.

Bright prospects

Insurer Aviva is another company on the road to recovery from the financial crisis. The progress of Aviva’s business and share price has been much stronger than RBS’s, particularly over the last three or so years, during which time the share price has doubled to reach a current level of over £5.

Of course, you have to say that Aviva has already delivered a considerable chunk of its recovery potential. However, prospects still appear bright for investors who missed buying at lower prices. As chief executive Mark Wilson said within the company’s recent half-year results: “After three years of turnaround we are now moving to a different phase of delivery”. Having strengthened the balance sheet and simplified the company, the focus is now on higher-return and faster-growth areas of business.

A forecast price-to-earnings (P/E) ratio of 10.7 for the current year, falling to 9.7 for 2016, suggests there is potential for considerable further upside to the share price. The return from a dividend yield of 4%, with prospects of strong increases to come, is not to be underestimated, either. As such, I prefer Aviva to RBS.

A sound business

As well as being in a very different industry to RBS and Aviva, Rolls-Royce is on a very different crash-and-recovery timeline. While the financials have been in recovery mode since crashing in 2008/9, Rolls is in the midst of a crash, following a string of profit warnings; and, indeed, the worst may not be over.

Shares in the company were pushing up towards £13 at the start of 2014. Today, they’re trading at around £8, having bounced off recent sub-£7.50 lows on a disclosure that US activist hedge fund ValueAct Capital has built a 5.4% stake. Analysts have been talking for a while about the potential value in breaking up the company to focus on aerospace, so it’s no surprise to see an activist investor getting involved.

Warren East — the former boss of another world-leading British firm, ARM Holdings — was appointed chief executive of Rolls last year, and is currently conducting an operational review of the group, about which he has said: “I am not ruling anything in or anything out at this stage”. However, it’s East’s addendum to that statement that makes me keen on Rolls as a recovery stock: “But Rolls is a sound business”.

I see the firm’s recent challenges — which include managing a transition from mature engines to newer, more fuel efficient ones, and weakness in offshore marine markets due to the low oil price — as providing an opportunity to buy into a quality company at what I believe to be a bargain price on a long-term view. A £76bn order book for a company whose annual revenue is running at £14bn bodes well for the future, and I rate Rolls a strong recovery stock.

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G A Chester has no position in any shares mentioned. 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.