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J Sainsbury plc, Redde PLC And Reckitt Benckiser Group Plc: 3 ‘Screaming Buys’ For 2016?

Shares in accident management and legal services company Redde (LSE: REDD) have risen by as much as 6% today after the release of an upbeat trading update. It said trading profits in the second half of 2015 will be higher than previously expected and materially ahead of last year’s figures.

In fact, the strong start to the year that the company referred to in its announcements of September and October has continued through to December, with Redde experiencing increased trading volumes. Furthermore, the FMG group has traded well since acquisition with a strong pipeline of new business opportunities. And with interim dividends being increased by 10% to 4.4p per share, Redde appears to be moving in the right direction.

Despite this, Redde appears to be rather fully valued. Its shares have a price-to-earnings (P/E) ratio of 20 and this indicates that the potential for an upward rerating may be limited. As such, it may be prudent to look elsewhere for a ‘screaming buy’ for 2016.

Headline grabber

Also appearing to be rather fully valued is Reckitt Benckiser (LSE: RB). It’s been in the headlines after its Nurofen painkiller product was pulled from the shelves in Australia due to alleged mis-labelling of products. Now, it’s being investigated for the same alleged issue in the UK, although with Reckitt Benckiser being a hugely diversified company in terms of geography and product offering, this is unlikely to hurt its sales or profitability on a group basis.

Of course, Reckitt Benckiser has excellent long-term growth prospects. Its exposure to the emerging world is a key reason to buy, with its consumer staple-focused product stable likely to experience a major increase in demand over the medium-to-long-term as consumers in the emerging world continue to become more affluent. However, with Reckitt Benckiser trading on a P/E ratio of 25.6, it appears to have limited upward rerating potential.

Bargain basement

One stock that’s dirt cheap at the present time is Sainsbury’s (LSE: SBRY). It has a P/E ratio of just 11.7 and while the outlook for the supermarket sector remains challenging, the general UK consumer outlook is very positive.

In fact, the UK economy is set to enter a new era in 2016. Just as the credit crunch ushered in a major shift in consumer spending habits, low inflation plus wage growth is likely to cause a reversal in the trend of seeking out the cheapest groceries. This should be good news for Sainsbury’s, which still has a competitive advantage over Aldi and Lidl when it comes to quality, customer service and location.

Certainly, 2016 isn’t expected to be a strong year for Sainsbury’s and with its bottom line due to fall by 2% next year, there may appear to be a lack of positive catalysts. However, with the company’s sales comparable to last year being so weak, even a slight rise in its top line performance could cause a sizeable upward rerating to its valuation in 2016 and beyond.

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Peter Stephens owns shares of Sainsbury (J). 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.