It’s been a rather disappointing year for investors in support services company Interserve (LSE: IRV). Its shares have fallen by 7% since the turn of the year, although longer term holders of the stock are still sitting on 157% capital gains over the last five years. Despite this strong gain, Interserve still trades on a highly enticing valuation, with its shares having a price-to-earnings (P/E) ratio of just 8.2.
Looking ahead, Interserve is expected to deliver a rise in its bottom line of 8% in the current year and a further increase in earnings of 1% next year. Taken together, this rate of growth is hardly awe-inspiring, but with the company trading on such a low valuation an upward re-rating is still very much on the cards.
A potential driver for this to take place is Interserve’s income potential. It currently yields 4.7% but, crucially, pays out just 38% of its profit as a dividend. This means that rapid shareholder payout rises could be on the horizon, which makes Interserve a top notch income and value play for 2016.
Star in the making
Similarly, Just Eat (LSE: JE) could be a star of 2016. Its shares have enjoyed a prosperous 2015, being up 46% since the turn of the year. However, there could be much further to go because Just Eat has significant expansion potential and appears to be gaining in terms of customer loyalty and brand recognition.
In fact, Just Eat is expected to increase its bottom line by 38% in the current year and then by a further 59% next year. But this strong rate of growth doesn’t appear to be priced-in to the company’s current valuation, with Just Eat trading on a price-to-earnings growth (PEG) ratio of only 0.9. And with Just Eat having excellent geographical diversity, its earnings could prove to be much more robust than many investors realise, thereby providing it with a highly enticing risk/reward ratio.
Comeback kid?
Meanwhile, Tesco (LSE: TSCO) could be a story stock of 2016, with the company’s new strategy likely to start to come good next year. Clearly, much of this depends on external factors such as the performance of the UK economy and how consumers react to a possible interest rate rise. However, with inflation likely to remain low and consumer disposable incomes increasing in real terms as a result, the era of price being the only important factor for consumers could be coming to an end.
Clearly, this would be good news for Tesco since it could mean improved sales and margins. Alongside the company’s simple strategy of becoming more efficient and customer-focused, Tesco’s bottom line is expected to rise by 78% next year. This puts it on a PEG ratio of 0.2, which indicates that 2016 could finally be the year that Tesco makes a comeback.