While 50% upside may sound like a rather optimistic gain, shares in Auto Trader (LSE: AUTO) have risen by 55% since they listed in March 2015. A key reason for this has been the impressive financial performance of the business and looking ahead, there is much more to come on this front.
For example, Auto Trader is expected to increase its bottom line by 15% in the current financial year and by a further 16% in the next financial year. Assuming Auto Trader maintains its current rating, this would lead to a share price gain of 33% in the next two years alone. However, with the motor vehicle listings company trading on a price-to-earnings growth (PEG) ratio of just 1.5, there appears to be sufficient upward rerating potential alongside its earnings forecasts to deliver at least a 50% gain in the company’s share price over the medium term.
Clearly, the performance of the UK economy has a major impact on car sales and therefore on Auto Trader’s performance. But from a risk/reward perspective, it seems to be a strong buy at the present time.
Future share price surge?
Also offering at least 50% upside is RBS (LSE: RBS). This may seem rather unlikely given that investor sentiment towards the part-nationalised bank is weak at the moment. Evidence of this can be seen in RBS’s share price performance, with its valuation having declined by 40% in the last year alone. And with the threat of Brexit on the horizon, it would be of little surprise for RBS’s shares to come under a degree of pressure in the short run.
However, over the medium-to-long term RBS’s shares could soar. That’s at least partly because the government’s share sale is likely to take place over that time period, with it indicating that RBS is returning to full financial health. This has the potential to improve investor sentiment in the stock and with RBS trading on a price-to-book (P/B) ratio of just 0.47, its shares could double and still be trading at below net asset value.
Risks vs rewards
Meanwhile, Premier Oil (LSE: PMO) continues to offer strong turnaround potential, which includes 50% upside, although it’s still a very risky buy. That’s because the outlook for the oil price is very uncertain, with supply continuing to exceed demand and the price of black gold having the potential to come under pressure in the short run. And with Premier Oil expected to remain lossmaking in each of the next two financial years, its near-term financial outlook remains downbeat.
However, this appears to be priced-in to Premier Oil’s valuation. It has a P/B ratio of only 0.72, which means its shares could rise by 50% and still be trading at only a small premium to their net asset value. As such, now could be a good time for less risk-averse investors to buy them.
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Peter Stephens owns shares of Royal Bank of Scotland Group. The Motley Fool UK has recommended Auto Trader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.