With the FTSE 100 having experienced a turbulent few months, a number of stocks could now offer improved risk/return ratios. Certainly, their valuations could come under pressure in the near term if investor sentiment continues to experience a period of difficulty. But in the long run, stocks with wide margins of safety may provide higher total return potential.
With that in mind, here are two shares which could offer solid investment outlooks. As well as having the potential to generate capital growth, they could both become strong income stocks for the long term.
Berkeley Group (LSE: BKG) is in the midst of an uncertain period. The prime property market is currently experiencing a challenging period, with house prices in London and other regions experiencing a decline. This is perhaps the first time this situation has occurred since the aftermath of the financial crisis, and shows that no asset will ever rise in perpetuity.
Likewise, it’s unlikely for house prices to continue to fall over the long run. A lack of supply and the potential for rising demand as Brexit talks continue means that Berkeley Group could be in a stronger position than the market is currently anticipating. As such, with the stock trading on a price-to-earnings (P/E) ratio of around 9, it seems to offer a wide margin of safety.
Since the company is expected to deliver on its capital return plan over the next few years, its dividend yield looks set to be in excess of 5%. This should ensure that it offers a real-terms income return, while its strategy and dominant position within the prime real estate marketplace means that earnings growth may return in the long run. While potentially volatile, the returns on offer could make it worth the risk.
While some stocks are likely to experience a high degree of volatility over the medium term, others may be able to offer a relatively defensive profile. One such company is food services specialist Compass Group (LSE: CPG). It has a solid track record of earnings growth, with its bottom line having increased in each of the last five years. And with double-digit growth recorded in four of those years, the company’s performance remains sound.
Due to that stability, demand for shares in Compass Group could increase in future. Investors may seek companies that are able to offer a degree of resilience should the performance of the wider index remain volatile.
Although Compass Group trades on a P/E ratio of around 22, its dependable performance may justify a premium valuation. And since it’s forecast to grow dividends per share at an annualised rate of around 8.5% over the next two years, it could become an increasingly attractive income stock over the medium term. As such, now could be the right time to buy it.
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Peter Stephens owns shares of Berkeley Group Holdings. The Motley Fool UK has recommended Compass Group. 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.