The FTSE 100’s 20% fall in recent weeks may cause some investors to determine that assets such as Cash ISAs and Bitcoin offer superior risk/reward ratios.
However, history shows that buying high-quality shares at low prices can lead to attractive returns in the long run. As such, now could be the right time to purchase FTSE 100 shares following their recent declines.
Here are two companies that may experience uncertain operating conditions in the short run. They could offer high returns in the coming years.
FTSE 100 retail star
FTSE 100 retailers such as Next (LSE: NXT) could experience a challenging near-term outlook due to the coronavirus outbreak. It may cause consumers to visit the company’s stores less frequently. However, this may be offset to some extent by a shift towards e-commerce.
In addition, weak consumer sentiment and ongoing Brexit talks may limit the growth prospects for the business in the short run.
Next reported stronger financial performance in its most recent trading update than previous guidance. This suggests its strategy of investing in online, enhancing its supply chain and improving the shopping experience for its customers could be increasing its competitive advantage over sector peers.
As with most of the FTSE 100, Next’s share price has declined significantly in recent weeks. Investors are now able to purchase the stock on a price-to-earnings (P/E) ratio of just 11.5. This suggests it offers a wide margin of safety compared to many of its sector peers and the wider FTSE 100.
Therefore, now could be the right time to buy a slice of what is a high-quality business. It has a strong track record of delivering sector-beating growth over a sustained period.
Travel and leisure companies such as IAG (LSE: IAG) have been among the hardest hit FTSE 100 businesses by the recent coronavirus outbreak. There has been a significant amount of disruption to the airline industry. And make no mistake, this could realistically increase over the coming weeks.
As such, investors are demanding wider margins of safety across the industry. This is especially so at a time when the financial standing of a range of airlines is coming under intense scrutiny. As a result, IAG’s share price has fallen by around 30% since the start of the year. This has caused its P/E ratio to fall to around 4 at present. But it would be unsurprising for its bottom line to come under pressure in the current year.
However, with IAG having a diverse range of operations and it being financially stronger than many of its sector peers, it may be able to expand its market share over the medium term. As such, investors may yet experience further declines in its valuation in the short run. But they could give way to a strong recovery in the coming years as the outlook for the wider economy improves.
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Peter Stephens has no position in any of the shares mentioned. 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.