Shares in credit card insurer CPP Group (LSE: CPP) have had a superb 2015, with them rising by 150% since the turn of the year. The key reason for this is the company’s excellent turnaround from just a few years ago when it was fined £10.5m by regulators and was forced to pay out over £65m in compensation to customers for apparent mis-selling.
Since then, though, a capital raising, new management team and an improving wider economic outlook have combined to improve the company’s long term prospects. In fact, in its recent half year results CPP announced that it had delivered a profitable period and appeared to be moving in the right direction regarding its transformation strategy to increase sales and reduce costs.
Certainly, today’s 5% decline in its share price is a disappointment, as is the apparent profit taking which has taken place in the last month. However, with CPP having a relatively bright future, its shares could return to growth over the medium term. As with any business which is in the middle of a major transformation, though, CPP’s shares are likely to be relatively volatile.
Also offering a somewhat uncertain future is Game Digital (LSE: GMD). It is a retailer of computer games and, with the key Christmas trading period being just around the corner, its financial performance in the next few weeks will have a major impact upon its full-year performance.
Clearly, sellers of branded goods can find it difficult to differentiate themselves from rivals on qualities other than price. As such, this means that their businesses can have a narrower economic moat than other retailers which have their own brand or niche product offering which is difficult to replicate.
And, while Game Digital has a clear strategy to offer a selection of pre-owned games in an omni-channel format, develop a community of gamers and also increase its exposure to the growing world of digital content, it remains somewhat reliant upon being competitive on price. This could lead to margins coming under pressure if rivals cut prices or if the UK and Spanish economies endure a challenging period.
Although Game Digital’s price to earnings (P/E) ratio of 10.5 is highly appealing, its forecast fall in earnings of 1% next year indicates that the business continues to struggle. As such, there appear to be better options available elsewhere.
One example is Tesco (LSE: TSCO), which has the potential to benefit from a shift in customer tastes over the coming years. Certainly, it has struggled to cope with the popularity of Aldi and Lidl in recent years, but no-frills, discount stores such as them have been around for decades – even when Tesco was in its pomp. In other words, it is a shift in customer attitudes towards food and its cost which has led to Tesco’s demise and, looking ahead, this could change as the UK economy goes from strength to strength and shoppers find their household budgets rising in real terms.
Although Tesco’s strategy has been lacking in recent years as it sought to become a ‘jack of all trades’, it is now focused on returning to its roots as a supermarket. With a sound strategy and its bottom line forecast to rise by 77% next year, its price to earnings growth (PEG) ratio of just 0.2 indicates that now is the right time to buy Tesco.
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Peter Stephens owns shares of Tesco. 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.