The decline in the FTSE 100 has been significant over recent months. In fact since May, it’s down by around 13%, which reflects deteriorating investor sentiment.
Of course, while a correction is painful in the short run, it could create buying opportunities for the long run. I think stocks such as Barclays (LSE: BARC) now appear to offer wide margins of safety, which could lead to improving total returns in the long term.
Clearly though, some cheaper shares may be worth avoiding due to the risks they face. One such stock released a trading update on Monday after a challenging period.
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Uncertain prospects
The stock in question is Safestyle UK (LSE: SFE), the manufacturer and retailer of PVCu replacement windows and doors. It has experienced significant financial challenges in recent months, largely due to a weak operating environment. This contributed to a fall in its share price of around 50% in the last year.
But the company’s update also showed an improved sales order intake since its Commercial Agreement with its co-founder Mitu Misra was delivered in October. It has seen a substantial increase in its contracted workforce across its canvass, sales, surveying and installation operations. It has also invested more than expected in lead generation, commissions and associated overheads. These are due to benefit its performance in the 2019 financial year.
Despite the potential for improving profitability, Safestyle UK faces a challenging operating outlook. Spending on non-essential items is weak at present, and this situation could continue as the Brexit process continues. As a result, it may be a stock to avoid, in my opinion.
Improving outlook
The FTSE 100’s fall could mean, though, that there’s now a number of buying opportunities around. The Barclays share price has dropped by 24% in the last year as investors have become increasingly concerned about the outlook for the world economy. That’s unsurprising, since the threat of a global trade war and the possible impact of rising US interest rates could hold back the financial performance of global businesses.
As a result, the margins of safety on offer could be wider than they have been for a number of years. This could create buying opportunities for long-term investors – especially since global GDP growth is expected to be around 5% per annum over the medium term. This suggests that while there are risks, the underlying prospects for global stocks could be stronger than investors are currently anticipating.
Since Barclays has a price-to-earnings growth (PEG) ratio of 0.7, it appears to offer growth at a reasonable price. Although there could be further falls in its share price ahead, investors who are able to look at the long-term prospects for the business and the wider economy may be able to generate improving returns from buying while the stock trades at a low ebb. From a risk/reward perspective, the bank could be highly appealing despite the uncertainty that it faces.
