The house building sector continues to offer exceptionally good value for money. Evidence of this can be seen in Persimmon’s (LSE: PSN) valuation, with the company currently trading on a price to earnings (P/E) ratio of just 12.3. This indicates that there is considerable upward rerating potential on offer over the medium term even after Persimmon’s shares have soared by 418% in the last five years.
A potential catalyst to enable this to take place is upbeat earnings prospects. Persimmon is expected to increase its bottom line by 28% in the current financial year, with further growth of 10% being forecast for next year. This puts Persimmon on a price to earnings growth (PEG) ratio of just 1.2, which indicates that its shares offer high growth at a very reasonable price.
Looking further ahead, the UK has a chronic shortage of houses. Part of the reason for this is strict planning laws which mean that, while demand for housing remains high, their supply is unlikely to be boosted significantly in the next few years. And, while higher interest rates and buy-to-let tax changes will inevitably dampen demand and curtail the pace of house price growth, volumes are likely to remain buoyant for Persimmon and its peers. This should enable double-digit earnings growth to continue over the medium to long term.
Similarly, Diageo (LSE: DGE) also has considerable total return potential, with the beverages company offering a discounted valuation versus a number of its global consumer peers. Certainly, Diageo’s P/E ratio of 21 is hardly cheap when compared to many of its index peers, but with SABMiller having traded on a higher rating and still having been the subject of a bid from AB InBev, it shows that there is the potential for an upward rerating to Diageo’s valuation in future.
A potential catalyst for this is Diageo’s exposure to emerging markets. While they are currently underperforming, countries such as China and India hold vast potential when it comes to increasing demand from middle income earners for premium alcoholic drinks brands. With Diageo having a stable of such beverages, it could return to the double-digit earnings growth rates last experienced in 2012. And, with the outlook for Europe and the US being relatively upbeat for next year, Diageo’s wide geographical spread entails a high degree of consistency, too.
Meanwhile, it has been a very challenging year for biotech company ReNeuron (LSE: RENE), with its shares falling by 16% since the turn of the year. Looking ahead, its £70m fundraising from July appears to be sufficient to see it through a number of key clinical milestones, with it significantly strengthening the company’s balance sheet. And, with 2016 expected to be an important year for ReNeuron, with several of its ongoing clinical trials due to report, its shares could remain volatile over the next year.
While the company’s losses widened in its most recent set of results, it remains a company which has significant long term potential. However, with losses set to increase over the next couple of years, investor sentiment could weaken and put the company’s valuation under even greater pressure. Therefore, it may be prudent to watch, rather than buy, ReNeuron at the present time.
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Peter Stephens owns shares of Persimmon. 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.