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Will Centrica PLC, Petrofac Limited And Eco Animal Health Group Plc Beat The Market In 2016?

Shares in animal pharmaceutical company Eco Animal Health Group (LSE: EAH) were given a boost today by an upbeat set of first-half results. In fact, the company’s sales increased by 27% to £21.5m and pretax profit rose by 33% to £2.7m as strong performance in all territories boosted the company’s financial outlook. Notably, demand for Aivlosin continued to grow strongly, with sales being 32% up on the comparable period from last year.

Eco Animal Health’s performance so far in the second half of the year has been strong, with the acquisition of distribution rights in Southeast Asia from last year having a positive impact on the company’s balance sheet. And, with sterling being relatively strong, its results are even better when currency fluctuations are factored out.

Looking ahead, the company has the potential to beat the wider market in 2016 even though its shares have risen by almost 50% in the current calendar year. How so?  Eco Animal Health is forecast to increase its bottom line by a massive  77% this year and a further 20% next year. This puts it on a price to earnings growth (PEG) ratio of just 1.1 which indicates that further excellent gains lie ahead.

Future focus

Also having the potential to beat the index next year is Centrica (LSE: CNA). Clearly, its performance is rather less impressive than that of Eco Animal Health as it’s at the beginning of a long journey that will see it refocus the business towards becoming a pureplay domestic energy supplier. This has the potential to rapidly improve investor sentiment – especially if Centrica can begin to deliver on the asset sales and cost savings that it said it will seek in the years ahead.

With Centrica trading on a price to earnings (P/E) ratio of just 11.9, it offers considerable upward rerating potential. As well as the delivery on its strategic goals having the potential to be a positive catalyst on its share price, Centrica’s dividend potential also has the scope to lift investor sentiment. For example, it currently yields 5.7% from a dividend that’s covered 1.5 times by profit. And with interest rates set to remain low, this could hold huge appeal for income-seeking investors in 2016 and beyond.

Risks and rewards

Meanwhile, the resources sector continues to offer major bargains. For example, support services company Petrofac (LSE: PFC) is forecast to increase its bottom line by 174% next year which, when combined with a P/E ratio of 22.8, equates to a PEG ratio of only 0.1. This indicates that the company’s shares could be due for a significant upward rerating during the course of 2016.

But there are some negatives, too. There’s the potential for downgrades to Petrofac’s earnings outlook. That’s especially the case with the future of the resources sector being exceptionally uncertain at the present time. And with capital expenditure among sector incumbents being slashed fast, the reality is that Petrofac’s bright future could become a little less shiny over the coming months.

While this is a risk for investors, the reality is that its risk/reward ratio remains hugely favourable. So, while volatility is almost guaranteed, Petrofac also has a very good chance of outperforming the wider index during the course of 2016.

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Peter Stephens owns shares of Centrica, ECO Animal Health Group, and Petrofac. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.