With 2016 set to be a tough year for UK-focused retailers, buying Next (LSE: NXT) may not appear to be a logical move. However, a degree of short term pain shouldn’t put off long-term investors, since Next offers a combination of a wide economic moat, high growth potential and a low valuation.
For example, Next trades on a price-to-earnings (P/E) ratio of just 12, which indicates that it has the scope for a major upward rerating. Furthermore, with its bottom line set to rise in both of the next two years, investor sentiment could improve over the medium-to-long term and help Next to beat the wider index.
Upside potential
Also enduring a challenging year has been Merlin Entertainments (LSE: MERL). The reduction in visitor numbers following the Alton Towers crash last year has dampened Merlin’s profit growth and caused investor sentiment to fall. However, Merlin is expected to record improved profitability in each of the next two years, aided by strong performance from elsewhere within its theme park portfolio.
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For example, Merlin is forecast to post a rise in net profit of 16% in the current financial year, followed by further growth of 15% next year. And with its shares trading on a price-to-earnings growth (PEG) ratio of just 1.2, they offer clear upside potential.
Similarly, shares in Boohoo.Com (LSE: BOO) appear to offer growth at a very reasonable price. The online fashion retailer is forecast to increase its bottom line by 28% this year and by a further 23% next year. Despite such upbeat forecasts, Boohoo.Com trades on a P/E ratio of 41, which equates to a relatively appealing PEG ratio of 1.6 when combined with the company’s forecasts.
With Boohoo.Com having its own clothing line, it’s likely to benefit from a higher degree of customer loyalty than is the case for its sector peers who are sellers of brands that can go in and out of fashion. This should provide Boohoo.Com with a wider economic moat and may cause its shares to outperform rivals in the long run.
Acquisition strategy
Similarly, Sainsbury’s (LSE: SBRY) may also have a major advantage over its rivals. While a number of its supermarket peers are selling off non-core assets, Sainsbury’s is seeking to improve its long-term growth forecasts through the purchase of Home Retail. This should provide the combined company with significant synergies as well as major cross-selling opportunities.
Clearly, it may take time to integrate Argos concessions into Sainsbury’s stores. But with Sainsbury’s seemingly buying Home Retail for a relatively low price, its long-term growth outlook could be far superior to the market’s present day expectations.
Meanwhile, Rolls-Royce (LSE: RR) could be a stock to watch in the long run. That’s because it is on the cusp of significantly improved financial performance, with the company’s bottom line expected to rise by 30% next year. And with the potential for a bid approach, its shares could move higher following their rise of 5% year-to-date.
Looking ahead, the defence sector is likely to experience a much improved period since the US economy is performing relatively well and as it’s the world’s largest military spender, demand for Rolls-Royce’s products could rise. Furthermore, with Rolls-Royce having a strong management team and a PEG ratio of just 0.6, it could prove to be a star buy for long-term investors.
