My 3 Favourite Stocks: Rio Tinto plc, BAE Systems plc And Royal Bank Of Scotland Group plc

While the FTSE 100 has fallen by almost 5% since the turn of the year, BAE (LSE: BA) has posted a gain of 4.5% year-to-date. This brings its capital gains for the last five years to 55% which, given the performance of the wider defence sector during that time, is a stellar result.

Of course, there have been challenging periods in recent years, with BAE releasing a profit warning and delivering low earnings growth. However, with the US economy improving and it being the biggest spender in the world by far on military goods, BAE’s future appears to be rather bright.

In fact, in the current year it’s expected to return to growth, with net profit forecast to be 5% higher than last year. This alongside a yield of 4.2% and a price-to-earnings (P/E) ratio of 13.3, indicate that now is an opportune moment to buy a slice of the company for the long haul.

Digging for victory

Similarly, buying Rio Tinto (LSE: RIO) also appears to be a shrewd move. Certainly, it’s experiencing a highly challenging period at the present time and things could get worse before they get better, with there being the potential for further falls in the price of iron ore. However, Rio Tinto’s financial standing appears to be sound and sufficient for it to ride out the current challenges it faces.

For example, it’s ahead of its own cost savings targets, has excellent free cash flow and a gearing ratio of just 21%. And with the company increasing production and maintaining a low cost curve, it has the potential to emerge from the current crisis in a stronger position relative to its rivals.

Furthermore, with Rio Tinto currently yielding a whopping 8.8%, it remains an enticing income play even if dividends are reduced over the medium term.

Buying opportunity

Meanwhile, RBS (LSE: RBS) has also been a disappointment in recent months, with its share price having fallen by 22% in the last year. Clearly, concerns surrounding the global economic outlook have dampened enthusiasm for the bank, but its overall performance as a business continues to move in the right direction.

For example, RBS is forecast to recommence dividend payments in 2016 after a long gap. Although it’s set to yield just 0.4% in the current year, dividends will represent just 5% of profit and so have scope to rapidly rise in the coming years.

Furthermore, dividends are a signal that RBS is returning to full health and with the government’s share sale set to commence over the medium term, investors are likely to view the bank as being almost back to full health. This has the potential to push its share price northwards.

With RBS trading on a P/E ratio of just 12.7, there’s vast scope for an upward rerating. Although it may take time for this to take place, buying now seems to be the right move for long-term investors.

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Peter Stephens owns shares of BAE Systems, Rio Tinto, and Royal Bank of Scotland Group. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.