The defence sector has endured a troubled number of years with austerity and defence cutbacks across the developed world reducing demand for its products. One company that has seen its profitability growth rate stall somewhat is BAE (LSE: BA), with its bottom line falling by 10% last year and being due to decline by another 1% in the current year.
But looking ahead to 2016, BAE is forecast to report a rise of 5% in its earnings. This has the potential to significantly improve investor sentiment in the stock. It may not be an impressive rate of growth but it shows that BAE could be at the start of a turnaround. As such, its current price-to-earnings (P/E) ratio of 13.1 holds considerable appeal and as we move through 2016, it could head upwards.
In addition, BAE’s shares also offer an excellent income return. They yield 4.2%. With the company having growth potential over the medium term as the developed world’s economic performance improves, it seems likely that its investors will receive an above-inflation income rise in 2016 and beyond. Therefore, now seems to be a good time to buy a slice of the business for the long term.
South Africa exposure
Also enduring external challenges is Investec (LSE: INVP), with its shares being highly volatile of late due to fears about the future of the South African economy. Clearly, Investec’s large exposure to South Africa means that its share price performance is closely linked to what happens in that country. While this risk is relatively significant, Investec’s current valuation appears to take it into account and provides a sufficiently wide margin of safety to merit investing for the long term.
For example, Investec trades on a forward P/E ratio of just 9.1 and, with the company’s shares having a forward yield of 5.7%, they also offer superb income prospects. While further volatility seems relatively likely, long term investors who can stomach major share price movements in the short run appear to be likely to earn high rewards in 2016 and beyond.
Medium term opportunity
Meanwhile, the falling oil price has been a major drag on Tullow Oil’s (LSE: TLW) financial performance in recent years. For example, it made a loss of $2bn last year and its shares have fallen by 58% in the last year.
Despite this, Tullow has considerable medium term potential. Certainly, the price of oil could come under further pressure, but with Tullow set to vastly increase its production next year when the TEN development project is due to come onstream, its profitability is set to rise at a rapid rate. In fact, Tullow’s earnings per share are forecast to be 851% higher in 2016 than in 2015 and as a result, its shares trade on a price-to-earnings growth (PEG) ratio of only 0.2. This indicates that a sufficiently wide margin of safety is on offer, even though Tullow Oil remains a very volatile investment opportunity.
Peter Stephens owns shares of BAE Systems. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.