With the outlook for the FTSE 100 relatively uncertain at present, there could be a number of shares offering wide margins of safety. Buying them now could mean a period of increased volatility but, in my opinion, it may also equate to high potential rewards in the long run.
One stock that could be worth a closer look is Centrica (LSE: CNA). The company has endured a period of significant uncertainty, but may be able to outperform the wider index in an uncertain era. Another stock that could have a wide margin of safety and a favourable risk/reward ratio released a relatively positive update on Friday.
The company in question is oil & gas production and development business Eland (LSE: ELA). It released an operations update which showed development operations on the Gbetiokun field are continuing as planned, following the successful infill drilling on Opuama. The company continues to believe development of Gbetiokun has the potential to deliver a 50% increase in oil production from OML 40, which could lead to improving financial performance.
Looking ahead, the stock is expected to report a rise in earnings of 48% next year. Despite this, its shares seem to offer a wide margin of safety, having a price-to-earnings growth (PEG) ratio of 0.1. This suggests they may offer capital growth potential.
Clearly, the outlook for the wider oil & gas sector could hold back Eland over the near term. Uncertainty regarding the future for the world economy, and its potential impact on demand for oil, may lead to disappointing share price performance for a number of sector incumbents. But with what seems to be a sound strategy, and a high forecast growth rate in earnings, the stock could also offer high potential rewards.
With the prospects for the UK economy seemingly uncertain at present, investors may adopt an increasingly cautious stance. This could make defensive shares, such as Centrica, more appealing versus cyclical stocks, as investors place greater emphasis on business models that may be less closely correlated to the performance of the wider economy.
Certainly, the company faces a number of risks. Political risk remains high – especially since the government’s slim majority may now have disappeared. This could leave a weak government. And with the potential for nationalisation should there be a change in leadership, Centrica’s valuation may continue to trade at a discount to its intrinsic value. There is also regulatory risk from the price cap, which could have a negative impact on its financial outlook.
With the Centrica share price having a dividend yield of around 8%, though, the stock may offer a margin of safety. In a period where the FTSE 100 is displaying a significant amount of volatility, the stock may be able to deliver relatively sound total returns. While not without risk, it could become an increasingly popular share, relative to some of its index peers.
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Peter Stephens owns shares of Centrica. 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.