With the FTSE 100 having fallen by 0.2% since the turn of the year, it is understandable that many investors are feeling somewhat disappointed with the performance of shares this year. After all, it has been a rather volatile year, with the General Election, Greek debt crisis and concerns about China causing a degree of fear among UK investors.
However, there are still reasons for optimism; one of which is the potential to earn excellent returns over the medium term from stocks that have considerable potential. One such company is Santander (LSE: BNC). Like the FTSE 100, it has endured a difficult twelve months, with a placing, dividend reduction and concerns surrounding the prospects for the Eurozone causing investor sentiment in the bank to decline.
Looking ahead, though, Santander has huge potential to deliver 20%+ capital gains. That’s because the bank’s shares offer a wide margin of safety, with them having a potent mix of strong growth prospects and a low valuation. For example, Santander is expected to post earnings growth of 8% in the current year, followed by 11% next year. This is ahead of the growth rate of the wider index and yet Santander trades on a price to earnings (P/E) ratio of just 11.6. This indicates vast upside, since a P/E ratio of 13.9 (which would mean Santander’s shares trade 20% higher than their current level) is very achievable.
Similarly, online advertising specialist Blinkx (LSE: BLNX) also has the potential to offer 20%+ returns. Certainly, its recent performance has been disappointing, with the company falling into loss-making territory. However, with a new strategy and new focus, it is expected to come close to breaking even next year. This may help to improve investor sentiment, which has been very poor in recent months and contributed to a fall in Blinkx’s share price of 55% in the last five years.
Furthermore, Blinkx offers a very wide margin of safety so that even if its results do miss current guidance, its shares may not be hurt as badly as would normally be expected. For example, Blinkx trades on a price to book (P/B) ratio of 0.7 and, were its share price to increase by 20%, it would equate to a P/B of 0.84, which would still be cheap and worthy of purchase.
Meanwhile, alkaline battery specialist AFC Energy (LSE: AFC) is the odd one out of the three companies discussed here, since its recent past has been full of positive and encouraging news flow. For example, it has signed multiple agreements to provide energy across the Middle East and Asia, has turned a profit for the first time in its interim results and is becoming increasingly popular among investors, as a clean energy future comes more sharply into focus.
Certainly, AFC is hardly cheap at the present time. For example, it trades on a P/B ratio of over 15. However, it remains a company with a very bright future and one which could post stunning levels of profitability a lot sooner than many investors may believe. As such, and with its shares having risen by 400% year-to-date, a 20%+ gain appears to be very achievable.
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Peter Stephens owns shares of AFC Energy. 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.