All investors would love to make millions from their portfolio without having to do much work. In fact, many people have done just that through the purchase of high quality businesses at fair prices. Add a little patience and time to the mix and, surprisingly often, huge total returns and increased wealth can be the result.
However, finding the best stocks to buy can be challenging. That’s especially the case during turbulent periods for the stock market, since it can throw up a number of shares that appear to offer excellent value for money, but which in reality could be little more than value traps.
For example, Centrica (LSE: CNA) has posted a fall in its share price of 14% in the last three months, which puts the domestic energy supplier and gas producer on a price to earnings (P/E) ratio of 12.7. This is relatively low for a utility company, but in Centrica’s case it offers far less stability than most of its sector peers since it is at the beginning of a major restructure which will see it dispose of a number of gas production assets in the coming years as it focuses on becoming a pure play domestic energy supplier.
This should provide the company’s investors with greater certainty regarding future levels of profitability, since Centrica will not be so dependent upon the price of oil and gas. Moreover, it should mean that dividends are not slashed in future years as they were this year (by 30%) and, with Centrica having a yield of 5.3% and dividends being covered 1.5 times by profit, it appears to be a company with considerable long term total return potential.
The same could be said of BT (LSE: BT.A) as it shifts its strategy towards becoming a dominant quad play operator. In the long run its earnings growth is likely to be very upbeat and the current level of discounts, offers and investment that BT is making in its offering is likely to allow it to win more customers than many of its rivals, thereby placing it in a strong position in future years.
The problem, though, is that BT’s share price could come under pressure in the intervening period. That’s because it is taking significant risks in terms of its acquisition of EE and the considerable level of investment it is making in its pay-tv, mobile and broadband offering, with its balance sheet already having high levels of debt as well as a major pension liability. Therefore, while BT trades on a P/E ratio of 13.9, after falling by 6% in the last three months, there may be better opportunities to buy it further down the line.
Meanwhile, exhibitions company ITE Group (LSE: ITE) today reiterated its full-year guidance amidst challenging trading conditions for the business. The weak Russian and Asian economies are set to contribute to a fall in revenue of almost 22% versus last year, with net profit expected to fall by 25%. Looking further ahead, ITE Group’s bottom line is due to continue to fall, with a drop of 4% being pencilled in for next year.
Clearly, a lower oil price is affecting demand in Russia, while a weak Rouble is also hurting its short term performance. And, while ITE Group trades on a P/E ratio of just 9.4, its shares could continue to fall following their 16% decline in the last three months, meaning that a better opportunity to buy may present itself in the coming months.