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Think the Marks and Spencer share price will underperform the FTSE 100? Read this first

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The prospects for Marks and Spencer (LSE: MKS) may seem to be relatively downbeat. Consumer confidence in the UK is low, while online players continue to benefit from a tailwind. This is hurting the company’s financial performance, with changes in strategy thus far having proved largely ineffective.

However, with the company’s share price having fallen by 4% in the last year, it now seems to offer a low valuation. This could mean that it has an attractive risk/reward ratio. Alongside another cheap stock that released news on Wednesday, it could be worth buying for the long term.

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Low valuation

Offering a low valuation alongside Marks and Spencer is oil and gas production and development company Enquest (LSE: ENQ). It released news on Wednesday of a compensation settlement with Armada Kraken in relation to historic issues from the chartering of a floating production storage and offloading vessel (FPSO). A total of $15m will be paid to the charterers, which is to be fully settled by 17 December 2018.

Looking ahead, Enquest appears to offer an improving financial outlook. The company is expected to deliver a rise in earnings of 100% in the 2019 financial year. This puts it on a forward price-to-earnings (P/E) ratio of just 3, which suggests that it is dirt-cheap at the present time.

Certainly, the outlook for the oil and gas sector remains uncertain. And with the company being a relatively small operator compared to FTSE 100 oil and gas stocks, it may be somewhat risky. But with the potential for further rises in the oil price due in part to supply disruption, the prospects for the stock seem to be bright on such a low valuation.

Improving outlook

Marks and Spencer’s P/E ratio of 12 suggests that it may also have a wide margin of safety. Of course, consumer confidence is expected to remain weak in the near term, with spending likely to be under pressure during the Brexit process. But with wage growth now being ahead of inflation and expected to remain so over the coming months, the prospects for the retail sector could improve to some degree.

The latest strategy adopted by the retailer may also catalyse its financial performance. It is seeking to focus to a greater extent on the fundamentals of its business. This includes a refreshed online strategy which could help it to compete more effectively with online rivals. Alongside this, the company is also aiming to become more efficient, which may help it to deliver improving financial performance over the medium term.

With Marks and Spencer expected to return to positive bottom-line growth in the next financial year, its prospects may be better than the market is pricing in. As such, and while it has underperformed the FTSE 100 in recent months, a low valuation could help it to generate impressive total returns in the long run.

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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.

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