One of the secrets of billionaire investor Warren Buffetts early success was his willingness to buy stakes in companies that were out of favour with most other investors.
I try to take this contrarian approach with my own investing. I look for troubled companies thatI believe have good underlying businesses. In this article, Im going to take a look at two unpopular FTSE 100 stocks thatI believe could beat expectations in 2017.
Shopping for a bargain
J Sainsbury (LSE: SBRY) seems to be firmly out of favour at the moment. Investors werent excited by the supermarkets decision to buy Argos owner Home Retail Group. The shares seem likely to end the year in the red.
I think this gloomy outlook may be short-sighted. The Argos deal has the potential to solve most of Sainsburys problems. By relocating Argos stores into nearby supermarkets, property and transport costs should fall. Trading intensity sales per square foot should rise, boosting the groups operating profits.
Another key driver of growth for Sainsbury is financial services. Sainsburys Bank delivered an underlying operating profit of 65m last year almost 10% of the groups total. The acquisition of Argos Financial Services added a valuable 600m loan book to the banks assets and a move into mortgage lending is planned for 2017.
The final attraction is that Sainsburys current valuation provides plenty of upside potential, if earnings do start to rise. With a forecast P/E of 12 and a prospective dividend yield of 4.1%, the shares look cheap to me. I believe significant gains are possible from current levels.
This contrarian bet could pay off in 2017
Investing in Royal Bank of Scotland Group (LSE: RBS) has been a painful and frustrating experience in recent years. Ive stayed away so far, but recently decided to invest. I believe there are several reasons to think that 2017 could be a turning point for the UKs most battered and bailed out bank.
The first of these is that RBS is probably getting close to resolving the last of its big misconduct issues. Analysts are predicting a fine of as much as $12bn relating to mis-selling allegations in the US. This potential liability seems to be the main reason why it failed the recent Bank of England stress tests. Once this is out of the way, RBS should have a relatively clean sheet.
The second attraction is that although RBS is still weighed down with bad assets, the banks figures suggest to me that its core operations are profitable and attractive. Itreported an adjusted return on equity of 12% for its core operations last year. To put this in context, the equivalent figure for the whole group was -0.6%.
Chief executive Ross McEwan seems to be making steady progress. I believe he will eventually reach a point where investors are willing to look at the banks future potential, rather than its past problems.
RBS shares currently trade at a discount of about 35% to their tangible net asset value, with a 2017 forecast P/E of 13.8. Consensus earnings forecasts have risen over the last two months. For investors who are willing to take a longer view, I believe RBS could be a profitable buy at current levels.
Roland Head owns shares of J Sainsbury and Royal Bank of Scotland Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.