It may seem as though things are going from bad to worse for Santander (LSE: BNC). That’s because its share price continues to fall, with it being down by 5% since the turn of the year and by 35% during the last year. And with the bank’s forecasts having been downgraded and the outlook for the Brazilian economy being highly uncertain (Brazil is a key market for Santander), investor sentiment Is unsurprisingly rather weak.
Certainly, Santander’s share price could fall further in the short run since it’s due to record a fall in its bottom line of 4% in the current year. However, Santander’s valuation indicates that it offers upside potential as well as a wide margin of safety. This means that its potential for further sizeable share price falls may be somewhat limited and that its risk/reward ratio appears favourable.
In fact, Santander’s price-to-earnings (P/E) ratio of 9.4 is low even in a banking sector that’s largely unloved by investors. Therefore, with growth in earnings of 11% forecast for next year, Santander seems to be a strong buy that could rise by considerably more than 20% over the long run.
Of course, the last year has been a very different experience for investors in accident management support company Redde (LSE: REDD). Its shares have soared by 42% during the period, with this rise taking their five year gain to 229%. While investor sentiment may still be rather high, Redde’s valuation could cause its share price performance to suffer somewhat.
That’s because Redde trades on a P/E ratio of 17.9 and with its bottom line due to rise by 7% in the current year and by a further 6% next year, this equates to a relatively high price-to-earnings-growth (PEG) ratio of 2.8. Although the company may deliver improved profitability in future years, this seems to already be priced-in to a large extent. As such, and with a number of other stocks offering superior risk/reward ratios, Redde’s shares may be ones to watch rather than buy at the present time.
Meanwhile, hedge fund manager Man Group (LSE: EMG) has been a rather disappointing performer in 2016. Its shares are down by 26% since the turn of the year and a key reason for this is the high degree of volatility present in global stock markets in recent months. Volatility has historically caused difficulty for hedge funds such as Man Group since there’s a lack of clear direction through which to generate alpha. And with volatility likely to remain high in future months, it would be unsurprising for Man Group’s shares to come under further pressure.
However, in the long run Man Group could easily rise by over 20%. That’s because it trades on a PEG ratio of 0.7, which indicates that there’s a wide margin of safety on offer. Certainly, forecasts can be downgraded but Man Group could prove to be a profitable investment – especially if asset prices move significantly in a particular direction.
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Peter Stephens has no position in any shares mentioned. 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.