Buying FTSE 100 stocks that have fallen heavily over recent weeks could be viewed as a risky move by many investors. They may continue to decline in the coming weeks, with the outlook for the world economy remaining highly challenged.
However, over the long run, a number of FTSE 100 companies could offer recovery potential. Here are two prime examples that have experienced 30%+ share price falls so far in 2020. But their financial positions and track records suggest now could be the right time to buy them in an ISA for the long run.
Housebuilders such as Persimmon (LSE: PSN) are facing unprecedented circumstances at the present time. The company’s sales are set to decline significantly over the current year as restrictions on people’s movement leads to intense challenges for the industry.
However, Persimmon has a cash position of £610m. That should provide solid financial cover to survive current economic challenges. It has also postponed its dividends in the current year. That should help it withstand what may yet prove to be a prolonged period of economic disruption.
But the company’s performance prior to the coronavirus outbreak had been improving. The investments it’s made in strengthening customer satisfaction ratings seemed to be having an impact. That could also help strengthen its financial performance in the long run.
Trading on a price-to-earnings (P/E) ratio of 6.1, following its 38% share price fall since the start of the year, Persimmon appears to offer a wide margin of safety. Ok, more difficulties could be ahead in the short term. But in the long run, it may produce a strong recovery as the housing market returns to growth.
Another FTSE 100 share that’s fallen heavily since the start of the year is BHP (LSE: BHP). The miner’s share price is down by 30% in 2020, with an uncertain outlook for the world economy weighing on investor sentiment.
Many major economies currently imposing restrictions on movement. So a lower level of economic activity seems highly likely over the coming months. Lower demand for commodities may cause BHP’s financial performance to deteriorate, despite producing a relatively impressive set of first-half results.
For example, the company reported an increase in its underlying attributable profit of 39% versus the first half of the previous year. Its free cash flow of $3.7bn also reflected higher iron ore prices. Meanwhile, its solid balance sheet suggests it has the financial strength to survive the current economic challenges facing many of its main markets.
BHP’s P/E ratio of around 7.5 also suggests that it could offer good value for money. Its profitability is almost certain to decline in the near term. But it seems to have the financial strength and recovery potential to post improving total returns over the long run.
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Peter Stephens owns shares of Persimmon. 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.