With the FTSE 100 moving past 7,500 points recently, it may seem strange to declare there are still ‘turnaround’ shares on offer to investors. After all, it may seem at first glance as though the market has already priced in the expectations for most companies. However, here are two stocks which could deliver surprisingly strong capital gains in the long run.
Reporting on Friday was Oil & Gas explorer Cairn Energy (LSE: CNE). It continues to make excellent progress with its drilling programme, with the company’s operations in Senegal offering significant production potential from its SNE field. Production in Cairn Energy’s North Sea assets is set to commence this year, which should improve the company’s cash flow and may lead to a higher valuation over the medium term.
With Cairn Energy due to move from loss into profit next year, its shares could gain a boost from improving investor sentiment. Certainly, they may have a forward price-to-earnings (P/E) ratio of 23, but with the potential for earnings growth beyond 2018 they could command an even higher valuation.
While the outlook for the oil price is uncertain, Cairn Energy looks to have benefitted from the supply glut of recent years. Its development costs have been relatively low and this has allowed a number of its projects to come in below budget. And with production cuts from OPEC likely to allow demand to catch up to supply in the near term, the company’s profitability could be boosted by a rising oil price over the medium term.
Also offering capital growth potential in the long run is diversified resources company Vedanta (LSE: VED). It has endured a difficult period, with low commodity prices causing its bottom line to slip into the red. However, for the 2017 financial year to the end of March it is due to have moved back into profitability. This has the potential to provide a boost to investor sentiment in the short run. It could also help to improve the company’s financial standing.
Looking ahead, Vedanta’s pretax profit is forecast to rise from £1.2bn in financial year 2017 to as much as £2bn in the next financial year. This rapid growth means that the company’s shares trade on a forward price-to-earnings (P/E) ratio of just 5.5. This suggests that there is scope for a sustained rise in the company’s share price, with a wide margin of safety also providing a degree of support in case the company’s outlook deteriorates.
Clearly, investing in resources stocks is a relatively risky decision. Commodity prices could move sharply in either direction. However, with a low valuation, a large amount of diversity and improving financial performance ahead, Vedanta seems to offer an enticing risk/reward ratio for the long run. Therefore, even with the FTSE 100 at a record high, now could be the right time to buy it.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.