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3 of 2016’s hottest stocks? Banco Santander SA, Rentokil Initial plc and Softcat plc

2016 has been a tough year for investors in Santander (LSE: BNC). Its shares have fallen by 6% since the turn of the year and the bank’s near-term outlook is rather uncertain. That’s because of challenges in its key markets and while Santander is well-diversified, the UK and Brazil remain two important economies for the global banking giant.

With the Brazilian economy likely to offer lacklustre growth over the coming months and the UK economy offering little certainty due to the upcoming EU referendum, investors appear to be rather downbeat about Santander’s prospects. That’s also the case because the bank’s forecasts have been downgraded in recent months, with Santander now forecast to report a fall in earnings in the current year of 4%.

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Although this result would be disappointing, Santander’s share price now appears to fully price-in further problems it potentially faces. For example, it trades on a price-to-earnings (P/E) ratio of just 9.2, which indicates that Santander has a relatively wide margin of safety and could therefore offer significant upward rerating potential. And with Santander expected to return to double-digit bottom-line growth in 2017, buying now could be a shrewd move.

Income potential

While Santander’s shares have fallen since the turn of the year, support services company Rentokil (LSE: RTO) has soared by around 10%. This seems to be at least partly due to the company’s upbeat earnings growth outlook, with the pest control specialist forecast to increase its bottom line by 15% in the current year and by a further 17% next year. This puts it on a price-to-earnings growth (PEG) ratio of just 1.7, which indicates that its shares offer considerable upside.

With Rentokil yielding just 1.8%, its near-term income prospects are disappointing. However, as dividends are covered three times by profit, there seems to be significant scope for much higher shareholder payouts in future years. Therefore, as well as being a sound growth and value play, Rentokil could become a strong income stock in the long run too.

Wait for a price drop?

Meanwhile, shares in IT infrastructure specialist Softcat (LSE: SCT) have fallen by 8% since the turn of the year. While that’s a disappointing performance, Softcat’s shares still seem to be rather expensive given that they trade on a P/E ratio of 18.1.

Certainly, Softcat is forecast to increase its bottom line in both the current year and next year following a strong recent period that has seen its bottom line rise by over 50% in just two years. However, with earnings due to rise by 8% this year and by just 3% next year, the resulting PEG ratio of 4.6 is rather expensive. That’s not to say that Softcat is worth avoiding in the long run, but it could be prudent to await either a lower share price or a significant upgrade to its outlook before piling-in.

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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.

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