Two contrarian bets for 2017

It’s becoming difficult to find bargains on the FTSE 100 as the index hits record highs, but investors willing to take a look at out-of-favour stocks will find that there are at least a handful of great companies out there trading at decent prices.

Fantastic potential

One stock that hasn’t had a great 2016 but has the potential to be a fantastic long term holding is insurance giant Prudential (LSE: PRU). Its shares have shed 12% since the start of the year as fears over a Brexit-led recession, struggles in the asset management business and slowing growth in China have sapped investor enthusiasm.

But whilst a recession could certainly hit all insurers hard, Prudential is better insulated than most. That’s because the company is very geographically diversified, and the UK only accounted for 23% of profits in the first half. And, of course, the post-referendum economic data released thus far hasn’t exactly intimated a recession is right around the corner.

It’s true that year-on-year operating profits for its M&G asset management arm did fall 10% in the first half, as net outflows hit all asset managers hard. But, that said, this remains a highly profitable business that will bounce back as volatile markets calm down and investors begin to once again put their money to work.  

The third point that has counted against Prudential — its high exposure to China — is in fact a strength in the long term. Despite weakness in the Chinese economy, that country’s increasingly wealthy citizens are turning in droves to Prudential’s life insurance and asset management offerings. In fact, profits from Asia in general increased a full 17% at constant currency rates, year-on-year, in H1.

Combining growing profits and dividends with long term potential and a low 11.9 forward P/E makes Prudential one share I’ll be watching closely in 2017.

Very attractive

Shares of asset manager Schroders (LSE: SDR) have recovered from the deep hole they found themselves in immediately post-Brexit, but are still down around 5.5% in 2016. Like Prudential’s asset management arm and other competitors, Schroders has fallen out of favour due to fears of a possible recession, and volatile markets leading nervous investors to pull their money.

Yet, Schroders has largely avoided the large redemptions that rivals have faced, as evidenced by the £2.7bn in net inflows to its funds since January. Combined with a £55.5bn increase in funds due to investment returns and small bolt on acquisitions, pre-tax profits only fell slightly to £436.2m.

Looking ahead, Schroders is very attractive for several reasons.

First, the asset management business can command high margins, and Schroders 35% pre-tax margins through September are indeed impressive. Second, Schroders has a good mix of institutional and retail clients, affording diversification. Third, Schroders is targeting significant growth through expansion into the US and Asia. Add all of these ingredients together with a very large family stake and a growing 3.1% yielding dividend and Schroders shares begins to look attractive, even at 16 times forward earnings.

A comfortable retirement

Of course, cyclical stocks such as insurers and asset managers aren’t for the very faint of heart. That’s why the Motley Fool’s top analysts have chosen defensive stocks as their Five Shares To Retire on.

These companies’ steady sales, reliable dividends and high moats to entry could secure your comfortable retirement.

To get your free, no obligation copy of the report, simply follow this link.

Ian Pierce 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.