While the FTSE 100 has endured a very disappointing five years, with it rising by just 2.5% during the period, shares in BT (LSE: BT-A) have soared by 155%. A key reason for this is the successful implementation of an ambitious strategy thathas transformed BT into a quad play operator, with the company now offering pay-TV and mobile alongside landline and broadband products.
Furthermore, BT has invested heavily in superfast broadband and has arguably stolen a march on a number of competitors in this space, with deep discounting causing its customer numbers to swell quickly. This provides it with considerable cross-selling opportunities and the market appears to fully back this strategy.
Although BT has proved to be an excellent investment in recent years, its risk/reward ratio appears to be less favourable today. Thats because its ambitious strategy could put pressure on its financial outlook. And while the 12.5bn acquisition of mobile network EE may be entirely logical, a high level of debt and a vast pension liability make BTs balance sheet somewhat less sound than a number of its index peers. With BT trading on a price-to-earnings (P/E) ratio of 15.1, further share price gains could be more modest versus the index in 2016.
Skys the limit
Within the same sector,Sky (LSE: SKY) appears to be a strong buy at the present time. Like BT, its expanding its product range and Sky Mobile is due to launch this year. This should allow the company to tap into the cross-selling opportunities thatare being exploited by its rivals. And with Sky forecast to increase its bottom line by 13% in the current year, its shares could continue their 31% outperformance of the FTSE 100 over the last year.
In fact, Sky trades on a price-to-earnings growth (PEG) ratio of only 1.3 which, for a company with a relatively sound balance sheet following its merger with Sky Deutschland and Sky Italia, seems to present a favourable risk/reward ratio. This, plus a dividend thats covered 1.8 times by profit and therefore could yield more than the current 3.3%, makes Sky a strong contender to beat the wider market in 2016.
Imagining for the future
Meanwhile, technology sector incumbent Imagination Technologies (LSE: IMG) has endured a highly challenging period with the intellectual property specialist underperforming the FTSE 100 by 37% in the last year. Key to this has been a disappointing set of first half results thatshowed Imagination Technologies is suffering from a short-term slowdown in the wider semiconductor industry. As such, earnings for the current financial year are set to fall by 28%.
Looking ahead though, Imagination Technologies expects operating margins to pick up and is relatively bullish about its longer-term prospects. With net profit forecast to bounce back with a rise of 52% in the next financial year, Imagination Technologies trades on a PEG ratio of just 0.6. This indicates that while its shares are likely to remain volatile, they have a very good chance of outperforming versus the index in 2016 and beyond.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Imagination Technologies. The Motley Fool UK has recommended Sky. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
