Buying any stock following a significant price fall could prove to be a risky move in the short run. The FTSE 100, for example, has declined significantly in recent weeks, and further falls could be ahead.
However, through buying high-quality companies that have recovery potential, you may be able to obtain favourable risk/reward ratios that improve your long-term financial prospects.
With that in mind, here are two FTSE 100 stocks that have declined by over 15% in recent weeks. They could deliver successful share price turnarounds in the coming years.
An increasingly uncertain near-term outlook for the world economy has contributed to a 15% fall in the Rio Tinto (LSE: RIO) share price in the past six weeks. With the company’s focus being on supplying iron ore, and the world’s largest market for the commodity being China, it is unsurprising that the mining stock’s valuation has come under severe pressure.
Looking ahead, investor sentiment may continue to be weak in the short run. However, Rio Tinto’s strong balance sheet and competitive cost base may mean that it is able to successfully overcome its present challenges to post improving financial performance in the long run. Furthermore, with interest rates having been cut in a range of countries, the global macroeconomic outlook may be supported by accommodative monetary policies.
Since Rio Tinto trades on a price-to-earnings (P/E) ratio of around 9.3, it seems to offer a wide margin of safety following its share price fall. This could mean that investors are able to obtain a favourable risk/reward ratio from a stock that appears to offer recovery potential over the long term.
Another FTSE 100 share that has experienced a significant decline in investor sentiment of late is Barclays (LSE: BARC). Its shares are down by over 20% since the start of the year, although its recent results highlighted that it is making progress in executing its strategy.
For example, the bank has maintained cost discipline and was able to produce an underlying rise in its pre-tax profit of 9%. Certainly, risks facing the UK economy could hold back its performance in the near term, while uncertainty regarding its management team may cause investor sentiment to remain unsettled.
However, the bank is forecast to post a rise in its net profit of 7% in the 2021 financial year. This suggests that its P/E ratio of 6 undervalues the business, while its dividend yield of 6.9% is almost 200 basis points higher than that of the FTSE 100 and is covered 2.4 times by net profit.
As such, now could be the right time to buy a slice of Barclays for the long run. Its share price performance has disappointed in recent months, but its valuation and growth forecasts could lead to a recovery in the coming years.
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Peter Stephens owns shares of Barclays and Rio Tinto. The Motley Fool UK has recommended Barclays. 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.