3 Top Recovery Stocks? HSBC Holdings plc, Burberry Group plc & AA PLC

Buying shares in any company after a major share price fall may appear to be a high-risk option. After all, there is usually a very good reason for a double-digit decline in a stock’s valuation and, more importantly, further falls could be just around the corner.

However, it also presents an opportunity to buy in at a more appealing price which, provided the company is still high quality and has a bright long term future, could lead to significant capital gains. In this sense, then, it could be argued that there is a lower risk versus buying highly valued shares for long term investors.

That appears to be the case with regards to HSBC (LSE: HSBA). Its shares have fallen by 16% since the turn of the year and the key reason for this is a slowing Chinese economy. Of course, ‘slowing’ is all relative and the world’s second largest economy continues to grow at over twice the pace of any developed nation. With HSBC being extremely well-positioned to benefit from this growth, its top and bottom lines could rise at a brisk pace over the medium to long term.

In addition, HSBC has also fallen out of favour with investors due to its lack of cost control. While a number of its peers have reduced staffing numbers considerably and cut operating costs, HSBC’s costs are at record highs. To address this it is implementing various initiatives which should make a real difference to its cost:income ratio and, with HSBC trading on a price to earnings (P/E) ratio of just 9.8, there is huge scope for a major recovery in 2016 and beyond.

Similarly, Burberry (LSE: BRBY) has been hit hard by slowing sales in China. With it being a key market for the business this is set to hit its financial performance in the short run, with Burberry’s net profit expected to fall by 6% in the current year. However, it is forecast to bounce back with positive growth next year and, for long term investors, its current P/E ratio of 16.9 has huge appeal while a number of consumer goods companies trade on considerably higher P/E ratios.

In the long run, Burberry is likely to grow sales at a rapid rate as a result of its very strong brand, the scope to diversify into new product categories and also price increases. These factors, alongside a recovering developed world and a rising emerging world, mean that now appears to be an excellent time to buy a slice of it.

During the last six months shares in the AA (LSE: AA) have fallen by a third and this puts the company on a P/E ratio of just 12.7. Given that it is forecast to increase earnings by 15% next year, this appears to be a very appealing price since it translates into a price to earnings growth (PEG) ratio of only 0.7.

Looking ahead, the AA is seeking to diversify away from roadside recovery and into financial products, with new credit card launches offering the potential for top and bottom line growth. Furthermore, it is seeking to expand its geographical reach, with it recently launching in India and having the scope to do so in other emerging markets. While the motor insurance marketplace may be set to endure a challenging period, the AA’s margin of safety remains sufficiently wide for investment and its twice-covered dividend yield of 3.4% has high appeal, too.

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Peter Stephens owns shares of Burberry and HSBC Holdings. The Motley Fool UK has recommended Burberry and HSBC 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.