Buying FTSE 100 shares that have fallen in value and become unpopular among investors may not seem to be a sound move. After all, they could experience further declines – especially with investor concern over the impact of coronavirus on the world economy.
However, buying shares while they trade on low valuations can enable you to obtain a favourable risk/reward ratio that improves the long-term prospects of your portfolio.
With that in mind, here are two FTSE 100 shares that have experienced severe declines in recent months, but which could offer recovery potential.
The recent full-year results from Rolls-Royce (LSE: RR) showed the company is making progress in implementing its efficiency programme. For example, it was able to reduce costs by £269m during the year. This helped it report a 25% rise in underlying operating profit, and could further enhance its financial performance over the coming years.
Of course, Rolls-Royce has experienced challenges, such as operational issues, with some of its products. They have caused investors to adopt a cautious attitude towards its shares, while the prospect of slower global economic growth may do likewise. As such, the stock may remain unpopular among investors in the short run.
However, in the long run, the company appears to have recovery potential. As well as its efficiency drive, it’s well-placed to deliver growth in its defence segment and well-positioned to capitalise on rising demand within civil aerospace in the long run. Since the stock trades on a price-to-earnings growth (PEG) ratio of 0.5, it seems to offer a wide margin of safety, which could ultimately translate into a high return.
The outlook for mining companies such as Glencore (LSE: GLEN) has become increasingly downbeat over recent months. As cyclical businesses, a slowdown in the world economy’s growth rate from coronavirus could lead to lower levels of profitability and weaker investor sentiment.
However, following Glencore’s 42% share price decline in the past year, the stock now has a price-to-earnings (P/E) ratio of just 11. This suggests investors may have factored in the prospect of a slowdown in its profit growth rate, as well as the regulatory difficulties it has faced.
The company’s plans to adapt its operations to a low-carbon economy could provide a growth catalyst in the long run. Its recent results showed that it’s making progress in this regard. Additionally, its exposure to precious metals and marketing activities may also provide a degree of support to its overall performance in the near term, should the world economy experience a severe decline in growth.
As such, now could be the right time to buy a slice of the business. It has a low valuation and what appears to be a sound strategy to return to profit growth.
It’s official: global stock markets have been on a tear for more than a decade, making this the longest bull market in history.
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Peter Stephens owns shares of Rolls-Royce. 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.