While lower-risk stocks can help to reduce portfolio volatility and offer a more reliable growth outlook, riskier stocks can mean higher returns. Therefore, for investors who are seeking to generate relatively high returns and who are less risk-averse than most of their peers, these two shares could be worth a closer look.
Improving performance
Diversified mining company Anglo American (LSE: AAL) released a production update on Monday which showed its current strategy is yielding improved results. The first quarter of the year saw a strong operational performance from the company, with a 9% increase in production on a copper equivalent basis when compared to the same quarter of the prior year. Of note was a rise in rough diamond production of 8%, and platinum production which was 1% up on the first quarter of 2016.
Of course, Anglo American has sought to de-risk its business of late. It has introduced major cost-saving measures and sought to create a more streamlined operation. While they seem to have worked relatively well, the reality is that the company’s financial performance is closely linked to the performance of commodity prices. Therefore, there remains a high degree of risk despite the important changes made to the company’s business model.
Still, the potential rewards from investing in the stock seem to be high. It is forecast to grow its bottom line by 33% in the current year and yet trades on a price-to-earnings (P/E) ratio of just 6.4. This indicates that while there may be relatively high volatility ahead and the company’s share price could be affected by currency changes, commodity prices and operational developments, its risk/reward ratio remains highly enticing.
Improving outlook
Investing in the Oil & Gas industry is relatively risky. The price of oil has failed to rise in recent months after a strong performance in the final quarter of 2016. Therefore, buying a relatively small production and exploration company such as Eland (LSE: ELA) could be an even riskier move, since it may lack the size and scale of its larger sector peers.
However, the company released a positive update on Monday. It showed that it is currently producing 8,000 barrels of oil per day from the Opuama-3 well, with around 120,000 barrels of oil having been delivered to the export terminal since its last update. It also announced a borrowing base review with its lender which now means it has sufficient funding for its upcoming work programme at Opuama-7. This is expected to start soon, with a target production of 17,500 barrels of oil per day by the end of the year.
Looking ahead, Eland is forecast to move into profitability this year after five years of losses. In 2018, its bottom line is due to rise by 107%, which puts its shares on a price-to-earnings growth (PEG) ratio of just 1.4. As such, the shares could rise significantly, although the risk remains high.
