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Are J Sainsbury plc, Bodycote PLC & International Consolidated Airlns Grp SA Capable Of 20% Returns?

It may be somewhat surprising to find out that shares in Sainsbury’s (LSE: SBRY) have risen by 1% since the turn of the year. As such, they have easily beaten the wider index, with the FTSE 100 falling by 5% during the same time period.

Clearly, the supermarket sector is enduring a difficult period and, with low cost, no-frills operators such as Aldi and Lidl continuing to open stores at a rapid rate, it appears as though competition within the sector is going to increase. And, while this is of concern for investors in Sainsbury’s, the mid-tier operator could rise by over 20% for the following two reasons.

Firstly, Sainsbury’s is likely to benefit from increasing disposable incomes in real terms for consumers across the UK. As today’s inflation figures showed, deflation remains a feature of the UK economy and, with wage growth being positive, this means that households across the UK can afford to relax their focus on price which has been ramped up by slow wage growth and positive inflation in recent years. Therefore, Sainsbury’s sales figures and, crucially, margins may be boosted over the medium term.

Secondly, Sainsbury’s trades on a price to earnings (P/E) ratio of just 11.4 and this indicates that further challenges within the supermarket sector are adequately priced in. Because of this, an upward rerating could be on the cards which has the scope to push the company’s shares over 20% higher over the medium term.

Also having capital gain potential is British Airways owner IAG (LSE: IAG). It continues to benefit from the twin effects of an improving global economy, with individuals and businesses prepared to spend more on air travel, as well as a low oil price which, in the next few years, seems unlikely to rise at a rapid rate.

Due to these effects, IAG is forecast to increase its earnings by 74% in the current year, and by a further 32% next year. Despite this high rate of growth, IAG trades on a price to earnings growth (PEG) ratio of only 0.2 and this indicates that its shares are set to continue the run which has seen them rise by 21% since the turn of the year. And, with IAG having a yield of 2.7% despite only paying out 24% of profit as a dividend, it could become a top notch income play over the medium to long term, too.

Meanwhile, shares in chemicals company Bodycote (LSE: BOY) have risen by as much as 9% today after it maintained its full-year guidance even though it is encountering very difficult trading conditions. Looking ahead, Bodycote has stated that revenue visibility is poor and that it expects the outlook for its divisions to remain challenging.

With Bodycote trading on a P/E ratio of 13.4, it appears to offer reasonable value for money. However, with its earnings due to fall by 8% this year and then rise by just 3% next year, it may struggle to post 20% capital gains in the medium term. As such, and while its restructuring strategy remains sound and it has a bright long term future via, for example, its greenfield investment programme, it may be prudent to wait for a keener price before buying a slice of the company.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has recommended Bodycote. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.