If you are looking for stocks that have the potential to double your money next year, then I highly recommend taking a closer look at challenger bank Virgin Money (LSE: VMUK).
Shares in the business, which was created through the £1.7bn merger of CYBG and Virgin Money in 2018, hit an all-time low earlier this year after management warned that the enlarged group could be faced with a shock PPI bill. Some City analysts speculated that the company would have to ask shareholders for extra money to meet this payout.
The good news is, as the business has sifted through these claims, the total forecast cost has fallen. This revelation was announced alongside Virgin’s annual results, which showed a pre-tax loss of £232m in the 12 months to September 30, compared to a £164m loss the previous year. However, the loss was mainly driven by PPI provisions and costs related to the merger.
As Virgin clears up these issues, the City is expecting the group to return to growth next year. Analysts have pencilled in a net profit of £323m for 2020, and earnings per share of 22.9p, that puts the stock on a forward P/E of 7.7.
Shares in the challenger bank are also dealing at a price-to-book value of just 0.5, which undervalues the business in my eyes. Loss-making companies deserve to trade at less than book value, but with Virgin set to return to profit next year, I think the stock should be trading at or around book value. That’s why I believe shares in Virgin Money could double investors’ money next year.
Another stock that I’ve also got my eye on is homebuilder Redrow (LSE: RDW). Shares in all of the UK’s homebuilders have been under pressure this year as investors have fled the sector. Political and economic uncertainty is driving investors away from these companies, that’s even though the UK is facing a structural housing shortage and every political party has committed itself to building more houses if they win the election.
With this being the case, I think UK builders look attractive right now, and Redrow is one of my top sector picks. The reason why I like this stock, in particular, is its valuation. Shares in the company are dealing at a forward P/E of 7.2, below the sector median of 9.4. The stock is also trading at an EV-to-EBITDA ratio around 50% below the sector average. On top of this, Redrow supports a dividend yield of 4.8%, which is expected to rise to 6.8% in fiscal 2021, according to City estimates.
Redrow has more than enough capacity on its balance sheet to maintain this distribution. The company ended its 2019 financial year with £124m of net cash on the balance sheet after returning a total of £218m to investors throughout fiscal 2019.
With demand for houses only set to increase over the next five years across the UK, I think Redrow’s cash generation will continue. With the stock undervalued by around 50% on some measures, I believe the shares could double from current levels as political uncertainty dissipates.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Redrow. 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.