Buying shares in unpopular companies may sound like a risky strategy. After all, such businesses are often not favoured by investors for good reason and investing in them could lead to unfavourable returns.
However, in some cases there may be investment opportunities on offer from stocks that other investors have deemed to be relatively unattractive. They may offer wide margins of safety that could lead to high returns over the long run.
One company which seems to be unpopular among investors at the present time is Glencore (LSE: GLEN). Although its share price has increased by around 19% in the last year, many of its sector peers have outperformed the company despite its prospects having improved significantly in recent years.
After a period of losses, the company now seems to be in the midst of improving financial performance. Its focus on boosting its balance sheet through debt reduction appears to have created a more solid foundation for future growth. Similarly, its reduced costs and more efficient business model look set to lead to a rise in its bottom line of 42% in the current year. This has the potential to catalyse investor sentiment and push its share price higher.
Despite its upbeat outlook and improving performance, Glencore trades on a price-to-earnings (P/E) ratio of just 12. This suggests investors remain cautious about its future prospects even though it’s now in a strong position to deliver sustainable growth in future years.
Certainly, the commodity sector is likely to remain volatile. But with the company now focused on materials used in electric vehicles, it appears to have a bright future given the trend towards cleaner vehicle usage across the world. Alongside the potential for a rapid rise in dividends as profitability moves higher, this could lead to high total returns for the company. As such, now could be the perfect time to buy it – even if many investors remains cautious about its outlook.
Growth at a reasonable price
Also offering a relatively low valuation right now is billing, charging and customer relationship software solutions provider Cerillion (LSE: CER). The company released a trading update on Monday which showed revenue for the first half of the year is expected to increase by 12% versus the previous year.
While EBITDA (earnings before interest, tax, depreciation and amortisation) is due to fall to £1.4 from £1.5m in the prior period, this is largely due to adverse currency movements. On a constant currency basis, EBITDA is expected to be around 13% higher than in the previous year.
Looking ahead, Cerillion is forecast to post a bottom line rise of 30% in the current year. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 0.6, which suggests that it’s unloved by investors. It also indicates that there could be significant capital growth potential ahead over the medium term.
Peter Stephens has no position in any of the 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.