With the FTSE 100 trading at over 7,000 points, it may seem difficult to find larger companies that are worth buying. Certainly, the index has risen sharply in recent months, but there are still companies offering low valuations and wide margins of safety. Here are two fine examples which could survive a downturn better than most stocks. They also provide significant capital gain prospects over the long run.
An improving bank
Barclays (LSE: BARC) has risen by 78% in the last six months as investor confidence in the sector has improved. The bank has also begun to implement a new strategy under a new management team. While its decision to slash dividends may have caused some investors to be disappointed with the short-term income return on offer, it should help to shore up the bank’s balance sheet. Alongside asset disposals which are planned, this could cause Barclays to gradually become a stronger entity which is less risky and therefore worthy of a higher valuation.
In terms of its valuation, Barclays trades on a price-to-earnings (P/E) ratio of 17.9. While high, its earnings are due to rise by 52% this year, which means that it has a price-to-earnings growth (PEG) ratio of just 0.3. This indicates that its shares could move higher and remain good value. And with dividends of 3p per share representing just 15% of forecast earnings for the current year, it wouldn’t be surprising for shareholder payouts to rise at a rapid rate over the medium term.
A defensive consumer stock
Whitbread (LSE: WTB) could prove to be one of the most surprising defensive stocks of the year. Although uncertainties surrounding Brexit could hurt the wider consumer goods sector, its budget focus within hotels and the high customer loyalty it enjoys within its coffee division mean that the company’s sales growth should remain robust.
For example, during the credit crunch many consumers traded down to Premier Inn from higher priced alternatives. With disposable incomes expected to fall on a real terms basis this year, there could be a repeat of this effect in 2017. Although coffee is a non-essential purchase, Costa has a high degree of customer loyalty and so its sales should continue to grow even if coffee becomes less affordable. Furthermore, a daily/weekly coffee is seen by many consumers as a luxury item that they’re unlikely to give up.
Whitbread trades on a P/E ratio of 16.2 and is expected to grow its earnings by a modest 6% this year. Its growth potential outside of the UK remains high and this is likely to be an area in which it focuses greater capital in future. For now though, the UK remains its key market and its resilience this year could prove to be a major attribute. Therefore, now could be an excellent time to buy it for the long term.
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Peter Stephens owns shares of Barclays and Whitbread. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.