With the outlook for the FTSE 100 being relatively uncertain, defensive stocks such as Compass Group (LSE: CPG) could become increasingly popular. Certainly, the support services company has seen its share price rising rapidly already this year, but there could be more capital gains ahead following Compass’s year-to-date increase of 9%.
A key reason for this is its forecasts that are upbeat and ahead of the expected growth rate of the wider index. In the current financial year, Compass is expected to record a rise in its bottom line of 10% and a further 9% next year. Although these growth rates aren’t the highest in the index, the chances of Compass meeting them are relatively high and investors may be willing to pay a significant premium during an uncertain period for such a reliable growth outlook.
Although Compass trades on a relatively high price-to-earnings (P/E) ratio of 21.6, if its rating is maintained over the next two years and it delivers on profit forecasts then it could trade over 20% higher.
Good time to buy?
Also offering 20% upside is BHP Billiton (LSE: BLT). Clearly, it’s a far less stable stock than Compass Group and a fall in commodity prices could easily send its shares lower by over 20%. However, BHP’s risk/reward ratio has huge appeal at the present time, which makes it a strong buy for less risk-averse investors.
A key reason for this is BHP’s valuation. The resources major trades on a price-to-earnings growth (PEG) ratio of 0.2, which indicates that it offers a very wide margin of safety. And with BHP having a sound balance sheet and excellent cash flow, it looks set to not only survive the current commodity downturn, but to also emerge from it in a stronger position relative to its peers.
Certainly, BHP’s share price has been hugely volatile in recent years, but with sentiment towards commodities on the up and BHP having the right strategy in terms of cutting costs and becoming more efficient, now could prove to be an excellent time to buy it.
Meanwhile, Burberry (LSE: BRBY) has also endured a tough period, but is expected to turn its fortunes around. Evidence of this can be seen in the company’s forecasts, with Burberry due to grow its bottom line by 7% in the next financial year. This could cause investor sentiment to improve and with Burberry trading on a P/E ratio of just 16, an upward rerating is very much on the cards.
Looking further ahead, Burberry remains one of the top brands in the fashion world and it commands a high degree of customer loyalty, as well as benefitting from a wide economic moat. This should mean that its sales and profitability growth rates remain relatively high, while Burberry’s yield of 3.4% makes it a strong income play – especially as dividends are covered 1.8 times by profit.
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Peter Stephens owns shares of BHP Billiton and Burberry. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.