After a disastrous 2018 that saw the FTSE 100 decline by 12%, the first quarter of 2019 has seen a welcome rise for the index. It has gained 7% since the start of the year, with investor sentiment improving significantly.
There are still, of course, a number of companies that remain unpopular among investors. Two examples are tobacco company Imperial Brands (LON:IMB) and housebuilder Bellway (LON:BWY). They offer low P/E ratios and a positive growth outlook, and could have the right strategies to generate high returns in the long run in my opinion.
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The trading update released by Imperial Brands last week showed that it is on track to meet expectations for the full year. Although forecast EPS growth of 3% for 2019 may be disappointing, the business is in the process of pivoting away from tobacco products. In their place, it is aiming to sell greater volumes of next-generation products, such as e-cigarettes.
Although reduced-risk products require significant investment, they appear to be more conducive to profit growth in the long run. Regulatory change and a shift in consumer attitudes towards healthier living may mean that cigarette volumes continue to slide. While it may be a challenging transition between ‘old’ and ‘new’ products, Imperial Brands seems to be managing it effectively.
With a P/E ratio of 9 and the financial resources to become an increasingly dominant player in the next-generation product segment, it could offer recovery potential. Its shares are clearly unpopular among investors, having fallen by a third in the last two years. But with change comes opportunity, and the stock’s risk/reward ratio suggests that it may offer a favourable investment outlook.
Results released last week by Bellway showed little sign of a slowdown in demand for new homes. The company reported a rising number of completions, as well as a higher average sales price. Together, they boosted sales and profitability. This suggests that even with Brexit-related risks, the impact of low interest rates, rising job numbers and government policies such as Help to Buy is overriding general consumer weakness.
Of course, the UK continues to have a significant housing gap. The number of new homes being built is forecast to lag demand growth over the next couple of decades. With Bellway investing in its land bank and in ensuring that it retains its five-star homebuilders rating, it seems to be well-positioned to capitalise on the potential tailwind offered by a supply/demand imbalance within the housing industry.
Since the stock trades on a P/E ratio of 7 and is forecast to record a rise in EPS of 5% this year, it appears to offer a margin of safety. Having fallen by 17% since the start of 2018, investors are clearly cautious about the stock’s prospects. Although political and economic risks are likely to remain in place throughout the calendar year, over the long run the company’s investment appeal appears to be significant.