3 resource stocks with 20%+ upside

With KAZ Minerals’ (LSE: KAZ) share price having risen by 57% in 2016, many investors may feel that now could be a good time to sell. However, the copper miner’s latest production report indicates that it has the potential to rise by over 20%.

That’s because its copper cathode production rose by 43% in the first half of 2016, with a commissioning of new mines being a key reason for this. Furthermore, KAZ is expecting production growth to continue in the second half of the year, with it being on track to meet 2016 guidance of 130-155 kt copper cathode equivalent.

With KAZ forecast to increase pre-tax profit from £15m in the current year to £97m in 2017, investor sentiment could rapidly improve over the medium term. And with it having a forward price-to-earnings (P/E) ratio of just 9.4, KAZ seems to offer good value compared to its sector peers and the wider index. As such, and while it remains dependent to a large extent on the prevailing price of copper, KAZ has 20%-plus upside and a very wide margin of safety.

Margin of safety

Also offering that kind of upside is Petrofac (LSE: PFC). The oil and gas support services business has endured a very challenging period and if the oil price falls then its shares could come under pressure. However, with it forecast to record a rise in earnings of 26% next year, its shares offer a wide margin of safety as they trade on a forward price-to-earnings (P/E) ratio of just 8. When combined with the company’s expected growth rate, this equates to a price-to-earnings growth (PEG) ratio of just 0.4, which indicates that Petrofac offers growth at a very reasonable price.

In addition, Petrofac has a yield of 6.7% and with dividends being covered 1.9 times by profit, there’s tremendous scope for a rapid rise in dividends over the medium-to-long term. With interest rates set to be cut tomorrow by the Bank of England, this dividend potential could cause investors to seek out high yielding stocks with growing dividends. Petrofac seems to fall neatly into that category and its shares could rise by over 20% as a result.

Growth and stability

Meanwhile, BP (LSE: BP) continues to offer an excellent mix of growth and stability. As with all resource-focused stocks, it’s highly dependent on commodity prices and its shares are likely to remain volatile as the outlook for oil is uncertain. But with BP having a sound asset base and being forecast to increase its earnings by 126% in 2017, it seems to offer a very appealing risk/reward ratio as well as 20%-plus upside at the present time.

Furthermore, BP trades on a PEG ratio of just 0.1. This is exceptionally cheap when the company’s diversity and financial strength is taken into account. As such, significant gains appear to be ahead for the company, while its dividend yield of 7.3% has huge appeal – especially when dividends are due to be covered fully by profit next year. This shows that while dividends may not rise or may fall somewhat over the medium term, a slashing of shareholder payouts seems to be relatively unlikely.

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Peter Stephens owns shares of BP, KAZ Minerals, and Petrofac. The Motley Fool UK owns shares of and has recommended Petrofac. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.