Buy-to-let property investors are facing a really tough time at the moment.
Tax changes have hit investors in the pocket, falling property prices have curved capital gains, and the increasing level of regulation landlords now have to comply with is driving up the overall cost of doing business.
With this being the case, I think buy-to-let investors would do much better to sell their properties and invest in FTSE 100 stocks instead.
Today, I’m going to outline two FTSE 100 growth companies I believe have the potential to outperform rental property over the long term.
Buy, build, sell
Melrose Industries (LSE: MRO) specialises in buying struggling engineering companies, improving operations, and then selling them on. Over the past 10 years, the company has carved out an impressive track record of improving companies, and it has achieved solid returns for investors along the way.
The stock has outperformed the FTSE 100 by around 4% per annum since 2009.
It doesn’t look as if this performance is going to come to an end anytime soon. Melrose acquired FTSE 100 peer GKN a few years ago and, so far, the business’s turnaround is going to plan.
In a trading update published last month, management declared that “improvements in the businesses are being delivered at pace.” The update went on to say management is confident these developments will “unlock significant further shareholder value.“
City analysts believe the company has the potential to report net income of £727m in fiscal 2020, that’s up from a loss of nearly £500m in 2018. These estimates put the stock on a forward P/E of 15.7, and there’s also a yield of 2.1% on offer for income seekers.
Turnaround gaining traction
Asia-focused bank Standard Chartered (LSE: STAN) is one of the UK’s most disliked financial service stocks.
Troubles began in 2015 when the bank had to report a surge in loan impairments in regions where managers had taken their eyes off the ball. These problems extended into 2016. However, after three years of hard work by management to get the business back on track, it looks as if Standard will return to growth in 2019.
City analysts are forecasting a net income for the year of $2.6bn, which puts the stock on a forward P/E of 11.5. With earnings per share set to grow a further 15% in 2020, according to current projections, shares in the bank are currently trading at a PEG ratio of 0.6, implying they offer growth at a reasonable price.
There’s also a 2.9% dividend yield on offer for income seekers, with the payout projected to hit 3.5% next year. Before the crisis struck the bank in 2015, shares in Standard usually changed hands for around 12 times forward earnings.
As growth returns, I think there’s a good chance the valuation could return to this level. If it does, and based on growth forecast for 2020, the stock could be undervalued by as much as 20% at current levels.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of Melrose. The Motley Fool UK has recommended Standard Chartered. 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.