While cash ISAs have been successful at encouraging people to save, the reality is that their returns are exceptionally low. In fact, they’re below inflation, and this means that the value in real terms of amounts deposited is falling each year.
In contrast, the FTSE 100 contains a number of stocks that offer growth potential. With dividend yields being relatively high, and valuations still reasonable in many cases, now could be the right time to buy shares, rather than save money through a cash ISA.
Low valuation
One FTSE 100 company that appears to offer an impressive total return outlook is housebuilder Persimmon (LSE: PSN). The company’s financial performance has remained robust in recent years, despite the risk of Brexit and the general slowdown in the housing market. For example, the stock’s bottom line has increased at a double-digit rate in each of the last five years, with demand for newbuild properties continuing to be high.
Looking ahead, demand for new homes is likely to remain significantly above supply. Interest rates are expected to remain low as the Bank of England seeks to maintain monetary policy stimulus during the Brexit process. The Help to Buy scheme is also providing additional support for the housebuilding sector, making buying a first home easier in many cases. And with continued population growth, there’s little sign of supply being able to meet demand over the medium term.
As such, Persimmon’s valuation suggests that it could offer high return potential. It has a price-to-earnings (P/E) ratio of under 10, and its bottom line is expected to maintain positive growth over the next two years. While unpopular, it has the potential to beat the FTSE 100 and boost an investor’s retirement prospects.
Improving performance
Another company that could provide strong growth potential over the long term is technology media stock RhythmOne (LSE: RTHM). It announced on Tuesday that its CFO has resigned, with a replacement already having been made.
The company also released a first-half trading update, delivering strong growth in revenue and profitability. That growth was fuelled by an impressive performance in programmatic platform revenues, with the business delivering on its key objectives for the year. For example, it’s grown its base of data-driven engaged audience segments, while innovating around video and connected TV advertising.
Looking ahead, RhythmOne is forecast to post a rise in earnings of 11% in the next financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.4, which suggests that it offers good value for money at the present time. While it’s a relatively small stock which could experience share price volatility, it appears to have a sound growth strategy as well as a wide margin of safety. As a result, its risk/reward ratio seems to be favourable at the present time.
