With the price of oil having plummeted over the last couple of years, many investors may be put off buying stocks operating within the oil sector. While this could be a sound move in the short run, since the price of oil may yet fall further, in the longer term there could be major gains on offer at companies such as BP (LSE: BP).
Thats at least partly because BP trades on a relatively appealing valuation. For example, it has a price-to-earnings (P/E) ratio of 14.9 and a price-to-book (P/B) ratio of 0.9, both of which indicate that theres upward rerating potential. And with BP having a high quality asset base thatremains well-diversified, it has considerable appeal due to a forecast rise in energy needs on a global basis in the coming years.
Furthermore, the problems faced by BP prior to the oil price fall (namely sanctions against Russia affecting investor sentiment due to BPs 20% stake in Rosneft, and the fallout from the Deepwater Horizon oil spill) seemto be reducing in terms of their impact on the companys long-term outlook. This could allow investors to demand BPs shares to a greater extent than in the past and provide additional fuel for capital gains moving forward. Although for 50% gains to materialise it seems imperative that the price of oil begins to recover over the medium term.
On the up?
Also offering strong capital growth prospects is house builder Persimmon (LSE: PSN). Its shares currently trade on a P/E ratio of just 11.4, which indicates that theres scope for a major upward rerating. A potential catalyst to make this happen is the companys excellent earnings growth profile, with its bottom line having risen at an annualised rate of 45% during the last five years.
This rate of growth is due to drop to 10% in the current year and may not reach higher levels moving forward as interest rate levels rise. But a tightening of monetary policy is likely to take place at a slow pace. As such, double-digit earnings growth in future years seems to be very achievable. When combined with the prospects for a major upward rerating, this means that Persimmons shares could easily rise by 50% over the medium term.
On track
Meanwhile, Johnson Service Group (LSE: JSG) today released a brief update thatstated it expects to report results for the year ended 31 December 2015 in line with market expectations. And while in 2016 its forecast to continue the positive earnings growth numbers of recent years, its share price appears to factor-in current expectations.
For example, Johnson Service Group trades on a P/E ratio of 14.4 and yet is expected to grow its bottom line by a rather modest 5% in the coming year. Although the company has a bright long-term future and has the potential to grow a dividend thats covered three time by profit, a rise of 50% or more seems unlikely over the medium term.
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Peter Stephens owns shares of BP and Persimmon. 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.
