Why BAE Systems plc, Tullow Oil plc And Pearson plc Are Set To Be The Surprise Stocks Of 2016!

With the oil price being low and its outlook still very uncertain, buying shares in an oil producer may seem counterintuitive. After all, there are other sectors that are performing much better than oil and that could deliver more stable returns in the long run.

However, in the case of Tullow Oil (LSE: TLW), its future seems to be much brighter than for the majority of its sector peers. That’s largely because it’s forecast to ramp-up production in the second half of the year as its Project TEN in Ghana comes onstream. As such, Tullow Oil’s pre-tax profit is expected to rise from £69m this year to as much as £215m in 2017.

The impact on investor sentiment of such a sharp rise in profitability could be significant – especially since Tullow Oil trades on a price-to-earnings-growth (PEG) ratio of just 0.1. Therefore, while the outlook for the wider oil sector may be highly uncertain, Tullow Oil could be a surprisingly profitable investment over the medium term.

Set to surprise

Similarly, BAE (LSE: BA) could also surprise the wider market with its strong performance in 2016 and beyond. A key reason for this is the improved prospects for the US economy, with economic data from the world’s largest economy indicating that it’s returning to full health. This bodes well for the country’s defence budget and as the USA is the world’s largest military spender by a wide margin, the impact on BAE’s order book could be very positive.

With BAE trading on a price-to-earnings (P/E) ratio of just 12.8, it seems to offer excellent value for money given the upbeat future outlook it now faces. And with the company’s shares yielding 4.3% from a dividend that has risen by 2.7% per annum in the last five years despite a slowdown in the wider defence sector, its prospects as an income stock seem to be highly encouraging too.

Turnaround potential

Meanwhile, education specialist Pearson (LSE: PSON) also has huge turnaround potential. It has endured a very troubled period in recent years, with the company releasing multiple profit warnings. And in the current year, the company’s bottom line is forecast to fall by 23%, which has the potential to dampen investor sentiment in the short run.

However, with Pearson having a sound strategy to turn its fortunes around, it’s expected to record a rise in earnings of 14% next year. This puts it on a PEG ratio of just 1 and as 2016 progresses, the market may begin to factor-in the company’s anticipated improved performance for next year. Although there’s a risk that Pearson will be unable to deliver on its targets, it appears to offer a sufficiently wide margin of safety to ensure that the risk/reward prospects that are on offer remain highly enticing.

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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.