A buying opportunity
Shares in Interserve (LSE: IRV) have fallen by 28% in the last months after it announced delays to its waste-to-energy plant. While disappointing, this provides investors with a chance to buy a slice of the business at a lower price, thereby offering greater capital gain potential.
With Interserve trading on a price to earnings (P/E) ratio of just 4.9, it seems to offer an exceptionally wide margin of safety. Certainly, there could be further pain ahead in the short run if news flow disappoints, but with the company being financially sound and reasonably well-diversified, its risk/reward ratio has considerable appeal.
Similarly, Restaurant Group (LSE: RTN) has endured a very difficult period, with its guidance coming under pressure due to an uncertain outlook for the UK economy. Its shares have halved this year, but with them now trading on a P/E ratio of just 11.7 they appear to offer excellent value for money. And while Restaurant Group’s bottom line is forecast to fall by 12% this year, it is expected to return to growth next year.
Furthermore, with Restaurant Group rumoured to be a potential private equity takeover target, its shares could gain a boost from a bid approach.
Mounting a comeback?
Also having difficulties of late has been education specialist Pearson (LSE: PSON). It has had a number of profit warnings in recent years but now seems to have a sound strategy through which to mount a successful comeback. This means that while Pearson’s shares could deliver lacklustre performance in 2016 as the company is set to record a fall in earnings of 24%, growth of 15% next year could cause investor sentiment to pick up strongly.
With Pearson trading on a price to earnings growth (PEG) ratio of just 0.9, it seems to offer excellent value for money alongside a yield of 6.4%.
A very bright future
While BAE (LSE: BA) also endured a challenging period due to the austerity policies across the developed world which put defence budgets under severe pressure, it now has a very bright future. That’s largely because the world’s biggest military spender, the US, is recording upbeat economic data and this could mean that the country’s defence spending rises over the medium term.
With BAE trading on a P/E ratio of 12.6 and forecast to increase its earnings by 6% next year, it seems to offer a highly appealing risk/reward ratio.
Slim margin of safety
Meanwhile, estate agency Purplebricks (LSE: PURP) has risen by 59% since the turn of the year as its innovative business model has proved successful with investors and property sellers alike. Looking ahead, there could be more gains to come, although they may be somewhat limited since Purplebricks trades on a forward P/E ratio of around 48.
This shows that its margin of safety is rather slim – especially given the uncertainty which surrounds the UK property market. Therefore, while Purplebricks has a bright long term future, it may be prudent to await either a lower share price or at least evidence that it is profitable before piling in.
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Peter Stephens owns shares of BAE Systems and Interserve. 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.