Buying shares in a company which has seen its share price fall can be a good or bad move. Clearly, if there is a fundamental problem with the business, it could lead to further declines. However, in some cases it can mean that a company with a bright outlook is available to buy for a wider margin of safety. This can improve its risk/return ratio significantly. With that in mind, here are two shares that have fallen heavily in recent months, but which could offer growth potential.
Reporting on Friday was oil & gas exploration company Pantheon Resources (LSE: PANR). Its shares rocketed 17% on the back of some good news, but they are still down 55% over the course of the last year.
Pantheon Resources delivered a high share price rise on Friday because of its signing of a contract for the Polk County gas processing facility. The contract has been signed with Kinder Morgan, which is the largest energy infrastructure company in the US, to install and operate a 15mmcf/d capacity gas processing facility. Installation of the facility is due to start in August, with targeted first production by September. At current pricing levels, the facility is forecast to generate over $1.5m per calendar month of free cash flow to Pantheon.
Clearly, investor sentiment has improved significantly after today’s news. However, the company continues to trade on a relatively low valuation. Using next year’s forecast earnings, it has a price-to-earnings (P/E) ratio of just 9.4. This suggests that while its past performance has been disappointing, it may offer considerable upside over the medium term.
Also offering capital growth potential within the oil & gas sector is Amerisur Resources (LSE: AMER). It has recorded a share price decline of 34% in the last year, although much of this could be due to weakness in the wider sector rather than internal challenges faced by the company.
Looking ahead, more difficulties are possible for the oil & gas industry. Although OPEC has signalled production cuts, thus far they have been insufficient to bring demand and supply into equilibrium. Therefore, the supply glut which has been present in recent years may continue over the medium term. This could cause downgrades to earnings outlooks and lead to more share price declines over a short timescale.
However, with Amerisur forecast to return to profitability in the current year before delivering growth of 87% next year, it could be worth buying at the present time. It currently trades on a price-to-earnings growth (PEG) ratio of just 0.1, which suggests that it offers high growth at a reasonable price.
Of course, both Amerisur and Pantheon could prove to be highly volatile in terms of their business performance and share price outlooks. However, with high potential returns, they appear to be worth the risk in the long run.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Amerisur Resources. 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.