Buying unpopular shares is never an easy means of generating high returns. After all, there’s often a period of time after purchase where their futures appear to be somewhat downbeat. This can lead to paper losses in the short run, as well as heightened volatility.
However, stocks such as Morrisons (LSE: MRW) could offer sound long-term investment potential. The company is making numerous changes to its business model within what remains a challenging wider sector. As such, it could be worth buying alongside another company which released results on Wednesday and who also appears to be unpopular among investors.
Uncertain future
The stock in question is estate agency Countrywide (LSE: CWD). It released a trading statement for the 2018 financial year, reporting total revenue of £627m versus £672m for the previous year. This was a relatively resilient performance given challenging operating conditions and a previously-reported 19% opening pipeline deficit in sales at the beginning of the year.
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The company has made progress in implementing its revised strategy. It’s been able to increase its register of properties available by 9% while building its expertise in Sales and Letting.
Although it remains cautious about future trading conditions, Countrywide is forecast to post a rise in earnings of 131% in the current year. This puts its shares on a price-to-earnings growth (PEG) ratio of around 0.1. This suggests it could offer a margin of safety. While potentially risky due to uncertain operating conditions, it may offer high return potential in the coming years.
Improving business
Also offering a positive long-term outlook is Morrisons. The company has made several fundamental changes to its business in the last few years, which have helped to strengthen its growth outlook and position within a highly competitive supermarket sector.
For example, a reduction in net debt has eased the pressure on the company’s balance sheet. It has even been able to commence a special dividend, which suggests it’s in a strong financial position. It has sought to improve levels of customer loyalty at a time when consumer confidence is weak, while the threat of budget retailers such as Aldi and Lidl remains high. This could provide it with a wider economic moat over the medium term, as the customer experience continues to improve.
Since Morrisons is now focused on its wholesale sales as well as retail sales, its level of risk may have been reduced in the last few years. It now has a healthy online and convenience store exposure. This may allow it to transition towards a more flexible operating model, which is better suited to fast-changing consumer tastes. As such, its long-term growth potential could be strong, and it could be worth buying while the wider retail segment is somewhat unpopular at present.
