Even though the FTSE 100 is now within just 3% of an all-time high, there could be further upside ahead. Certainly, the index is not as cheap as it once was, but within it there are stocks which continue to trade on reasonable valuations. Of course, this year could prove to be relatively volatile and uncertain. But the potential rewards on offer may make these two stocks worthy of investment at the present time.
Improving prospects
The outlook for mining companies such as Antofagasta (LSE: ANTO) appears to be improving. The copper miner is expected to increase its pre-tax profit from £207m in 2015 to £727m in 2016. A key reason for this is higher pricing and improvements made to the business. Antofagasta has restructured in recent years to create a more efficient and streamlined operation. This could help to improve profitability in future years.
In fact, over the course of the next two years, Antofagasta is expected to record an annualised rise in its bottom line of around 18%. Despite this, it trades on a price-to-earnings growth (PEG) ratio of just 1.3. This indicates that there is at least 20% upside potential on offer, especially since the mining industry looks set to benefit from improving commodity prices over the medium term.
The company could also be seen as a more resilient business than it has been in the past. The rapidly rising dividend indicates that its management team have confidence in its future financial performance. Although it yields just 1.1% at the present time, dividends per share are set to grow by over 21% per annum during the course of 2017 and 2018. And since dividends are covered 2.9 times by profit, growth of that pace could continue beyond 2018 and make Antofagasta a relatively enticing income play.
Low valuation
Despite the FTSE 100 being near a record high, investment company 3i (LSE: III) continues to trade on a price-to-earnings (P/E) ratio of just 10.2. Certainly, its earnings lack stability and look set to remain volatile over the medium term. However, this is the nature of its business, with its financial performance being less consistent than many of its sector peers.
Since it has such a low valuation, this uncertainty seems to be adequately factored in. Upwards of 20% in capital gains appear likely over the medium term, especially since its bottom line is set to rise by 8% in financial year 2019.
While inconsistent earnings mean 3i is likely to maintain a relatively low payout ratio, its current level of 34% could increase in future years. It is expected to post four consecutive years of earnings growth when it reports its financial year 2017 figures. This could convince the market that it deserves a higher rating, while also encouraging the company’s management to pay out a higher proportion of profit as a dividend.
Alongside a yield of 3.3%, this provides 3i with dividend appeal and means that in a year when inflation could rapidly rise, it may become increasingly popular among income-seeking investors.
