With the FTSE 100 having risen by 3% in the last month, it appears as though investor confidence is gradually starting to return following a disastrous start to the year.
However, investor sentiment in iron ore miner Rio Tinto (LSE: RIO) has picked up to an even greater degree, with the company’s share price rising by over 10% in the last month. Much of this rise is due to gains made by the wider resources sector and is therefore not Rio Tinto-specific. But with the company due to return to earnings growth in the next financial year, its share price could realistically continue to soar over the medium term.
Clearly, 2016 is due to be another poor year for Rio Tinto, with its bottom line expected to fall by 49%. However, the cost-cutting and efficiency measures that it’s successfully making are set to contribute to a rise in net profit of 39% in 2017. This puts the company’s shares on a price-to-earnings growth (PEG) ratio of just 0.4 and this indicates that there’s upside potential.
Certainly, the road to recovery won’t be a smooth one, but for investors who can live with relatively high volatility, Rio Tinto could be a star long-term buy.
It’s the real thing
Also offering upbeat growth prospects is Coca Cola HBC (LSE: CCH). The bottler and vendor for Coca-Cola’s products in Europe and parts of Asia is forecast to increase its bottom line by 5% in 2016 and by a further 11% in 2017. Although its shares trade on a rather rich price-to-earnings (P/E) ratio of 19.9, when the company’s growth rate is factored-in it equates to a much more appealing PEG ratio of 1.8. This indicates that Coca Cola HBC’s shares are fairly priced at the moment.
Of course, a key reason for that is the relative stability that Coca Cola HBC offers. It enjoys a considerable degree of diversification, with it selling products in 28 countries. And with the Coca-Cola brand enjoying an exceptionally high level of customer loyalty and a wide economic moat, Coca Cola HBC’s earnings profile is highly defensive. With confidence among investors having the potential to come under pressure moving forward owing to an uncertain global economic outlook, Coca Cola HBC could prove to be a worthy defensive purchase.
Wait and see with BT
Meanwhile, BT (LSE: BT-A) continues to outperform the wider market as its long-term future goes through a rapid transformation. As well as recently being allowed to keep control of Openreach (albeit at arm’s length), BT has also completed the £12.5bn acquisition of mobile network EE and will restructure its business to ease the integration process. In addition, BT continues to invest heavily in its superfast broadband pricing, as well attempting to improve its pay-TV offering through highly lucrative (and expensive) sports rights.
While this is clearly an exciting time for BT and in the long run it could prove to be a very strong performer, major change also brings additional risks. With BT having a significant amount of debt and a large pension liability, its risk/reward ratio lacks appeal right now. That’s at least partly because its P/E ratio stands at 15.7, thereby making it a stock to watch, rather than buy, at the present time.
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Peter Stephens owns shares of Rio Tinto. 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.