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Why Rio Tinto plc, Smiths Group plc & Berkeley Group Holdings PLC Are 3 Of My Favourite Stocks

Shares in diversified services and engineering company Smiths Group (LSE: SMIN) are up by over 3% after it released an upbeat set of results. In fact, its pretax profit for the full-year increased from £445m to £459m, with improved operating margins being the key reason for this. They increased by 50 basis points to 17.6% and more than offset a 2% drop in revenue, with Smiths Group’s Interconnect division having a relatively challenging year.

However, the benefit of being a diversified business is that other divisions can pick up the slack. Smiths Group’s Medical business posted its best ever sales growth, while John Crane was a surprisingly strong performer and was able to overcome the challenges posed by a troubled resources sector.

Looking ahead, Smiths Group offers resilience against a challenging global outlook and, while its profitability may come under pressure in the short run, it remains a high quality, financially sound business with a bright long term future. Furthermore, Smiths Group trades on a price to earnings (P/E) ratio of just 13.3, which indicates upward rerating potential, while its dividend yield is currently a very enticing 3.8%.

Similarly, Berkeley Group (LSE: BKG) also has impressive prospects. While houses in the UK may be rather unaffordable at the present time, there remains a major shortage of supply. This presents a superb opportunity for house builders such as Berkeley and, with it focusing on the prime property market, it could benefit from the uncertainty that has gripped the global economy.

That’s because, as was seen in the credit crunch, the UK is seen as a ‘safe haven’ by many foreign investors. As such, prime property is a relatively appealing asset during a crisis and, therefore, it is possible that demand for Berkeley’s houses could remain buoyant in the months and years ahead. And, with Berkeley trading on a P/E ratio of just 13.7, there is scope for capital gains over the medium term.

The mining sector also presents a superb opportunity at the present time. Certainly, commodity prices are at a low ebb and could move even lower, but for long term investors it presents an opportunity to buy high quality companies at discounted prices. For example, Rio Tinto (LSE: RIO) trades on a price to book value (P/B) ratio of only 1.2 which, for a dominant iron ore miner, seems to be unjustifiably low.

Clearly, Rio Tinto’s asset base could be written down in the next couple of years but, with a low cost curve and sound strategy of increasing production and generating efficiencies, the business is likely to remain highly profitable and able to weather the current commodity storm. And, in the meantime, a yield of 6.5% should keep the total return of its investors ticking upwards in the coming months.

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Peter Stephens owns shares of Berkeley Group Holdings, Rio Tinto, and Smiths Group. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.