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Are We Seeing A Golden Opportunity With Barclays plc, BHP Billiton plc And Home Retail Group plc?

Shares are down from recent highs at Barclays (LSE: BARC), BHP Billiton (LSE: BLT) and Home Retail Group (LSE: HOME) but the investment story remains compelling in each case. Are we seeing a good-value entry point for these shares right now?

Is this firm reinventing itself?

Home Retail Group trades as well-known outlet brands Argos and Homebase, and also runs a customer credit business. The £917 million market-cap FTSE 250 constituent’s multi-year share-price chart isn’t pretty, showing something of a roller-coaster ride but trending downwards. The problem seems to be the volatility of the firm’s earnings, which seem to undulate as wildly as the company’s share price, as we might expect.

It’s not the staid old brands and antiquated way of doing business that attracts me to this firm, as much as the cheapish-looking valuation and the strong-looking balance sheet. At the last count, the firm appeared to have zero debt, a chunky net cash balance and some robust-looking assets. At today’s 109p, the shares change hands on a forward price-to-earnings (P/E) multiple of around 10 for year to February 2017, and there’s a forward dividend yield of 3.5% with the payout covered nearly three times by forward earnings.

That valuation seems like a solid base for investors believing in Home Retail’s potential to modernise its operation and transform itself into something that could expand profitably from here. The firm is trying to change. With the recent half-year results, the company updated the market on its ‘transformation’ plan, saying that at Argos it now has 148 digital stores and internet penetration accounted for 45% of total sales. Meanwhile, the firm closed 25 Homebase stores during the period and digital sales grew to 10% of total sales.

Home Retail could rise as a new, nimble modern retailer, phoenix-like from the carcass of the old, but I’d be wary of the cyclicality in the retail sector, which the firm has felt so keenly in years gone by.

What about bigger cyclical firms?

As an alternative to Home Retail Group, I could go for bigger cyclical firms such as BHP Billiton and Barclays. However, when it comes to investing in the big miners I think it’s important to take a view on where we think commodity prices might be going. Traditional value indicators such as dividend yield and P/E ratings don’t tend to help us value out-and-out cyclical firms such as BHP Billiton very much. For example, at today’s 1060p share price the firm’s forward yield sits at about 7.6% for year to June 2016, but forward earnings don’t even half cover the payout. That means the dividend is at risk in my eyes.

The problem is earnings. Commodity prices don’t have to drop much further for earnings to go to zero and for losses to mount. I fear that might happen, so I don’t trust the firm’s P/E rating, yield or the share price. It’s not a big stretch of the imagination to see BHP Billiton’s shares halve from here, or more, so I’m steering clear.

Busy going nowhere?

Meanwhile, Barclays’ third-quarter results announcement yesterday caused the shares to drop on the day, even though the company announced progress on several key financial measures. I’ve been avoiding the big London-listed banks for several years, because I expect the shares to struggle to progress. So far, that’s been a good call, and there’s nothing in Barclays’ results to make me change my mind. Profits might be rising, but I’d argue that valuation-contraction could always drag on investors’ progress on total returns as the market tries to iron-out the effects of the firm’s cyclicality. The risk of owning shares in banks like Barclays now is that we still find ourselves holding when the next cyclical plunge arrives.

Of the three firms featured here, perhaps Home Retail Group is the closest to presenting us with a golden opportunity due the strength of the firm's balance sheet and its turnaround potential. However, the company does not seem as solid as those featured in a special Motley Fool wealth report that identifies five superior large-cap firms.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.