The FTSE 100 performance has been impressive so far in 2019. It’s gained around 6% since the turn of the year, with a number of its constituents becoming increasingly popular among investors.
While its prospects continue to appear bright as a result of having a 4%+ dividend yield and favourable growth potential, a number of stocks could outperform it. Here are two examples which seem to have wide margins of safety, and could therefore be worth a closer look.
Sustainable LED lighting specialist Dialight (LSE: DIA) released its 2018 results on Monday. They showed its profit was in line with expectations in what was a challenging year for the business. During the course of the year it was able to reduce late orders while bringing all product assembly back in-house. It has also terminated the relationship with its manufacturing partner, and aims to deliver further operational improvements during the current year.
Looking ahead, the company is forecast to post a rise in net profit of 47% in the current year. This has the potential to catalyse investor sentiment, while a price-to-earnings growth (PEG) ratio of 0.3 suggests the stock offers a wide margin of safety.
Certainly, the company’s past performance has been challenging. However, a revised strategy which includes three planned product launches in 2019, as well as a new market approach which centres on regional technical and product innovation, could catalyse Dialight’s performance over the long term.
Also having the potential to outperform the FTSE 100 is British American Tobacco (LSE: BATS). The wider tobacco sector has fallen out of favour with investors over the last couple of years, with concerns raised about its longevity. Increasing regulations and a shift in consumer tastes towards healthier lifestyles could impact negatively on demand. With relatively high and consistent volume declines across the industry, there could be further uncertainty ahead.
However, British American Tobacco and its peers also have growth opportunities in the reduced-risk product segment. Products such as heated tobacco and e-cigarettes are proving increasingly popular among consumers and, who knows, could even eventually replace cigarettes. As sales increase, the cost of production is likely to fall, and this could lead to improving profitability across the sector.
While cigarette volumes may be falling, prices continue to rise. This means British American Tobacco continues to deliver improving levels of net profit, with its bottom line forecast to rise over the next couple of years. With the company’s shares having a dividend yield of 7.3% from a payout which is covered 1.5 times by profit, they seem to offer value for money as well as income investing potential.
Therefore, while unpopular at the present time, the company could generate impressive total returns over the long run to outperform the FTSE 100. As such, now could be an opportune moment to buy it.
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Peter Stephens owns shares of British American Tobacco. 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.