While the aim of most investors to buy low and sell high makes sense in theory, in practice it is much more difficult. That's because share prices are never low without good reason and in order to buy low, you must accept a degree of risk. This could be from general uncertainty regarding the macroeconomic outlook, or from doubts surrounding the current performance of the company in question. Either way, there is always a risk that is reflected in the stock's lower price.
However, for long term investors this presents the perfect time to buy. That's because if you are thinking years ahead, then volatility in the short to medium term is not a major problem. Neither is a further fall in the company's share price, so long as it performs well and eventually can be sold when it is high.
With that in mind, here are three stocks that are trading on appealing valuations and, even though their share prices have disappointed in the past, they can turn things around in the long run and deliver top notch capital gains.
Rio Tinto Limited
In the last year, Rio Tinto Limited's (ASX: RIO) share price has fallen by 11%, with its earnings declining by 19.4% in its last financial year. And, with the iron ore price close to a ten-year low and the prospect of a bid from Glencore being somewhat less likely after Joe Hockey said he would block any such move, the company's future prospects may seem to be rather downbeat.
However, Rio Tinto is doing all of the right things given a tough operating environment. For example, it has increased production, implemented efficiencies and its bottom line is forecast to bounce back by 26% next year. Furthermore, it trades on a forward price to earnings (P/E) ratio of just 12.7 and yields 5.2%.
Woolworths Limited
The future prospects for Woolworths Limited (ASX: WOW) seem to be somewhat challenging, with the dual threat of increasing pressure on household budgets and the emergence of no-frills operators such as Aldi and Costco. As such, it seems to be inevitable for Woolworths' margins to tighten over the medium term, which is a key reason why its share price has slumped by 18% in the last year.
However, Woolworths remains an enticing defensive play, with it having a beta of just 0.67 and also offering a fully franked yield of 4.7%. As such, investors could be attracted to its defensive characteristics – especially since it trades on a price to sales (P/S) ratio of only 0.61, versus 1.62 for the ASX.
Oil Search Limited
Over the course of the last year, Oil Search Limited (ASX: OSH) has underperformed the ASX by 19%. However, its bottom line has remained robust even with a lower oil price hurting many of its energy sector peers, with Oil Search having increased net profit by 69.5% in the last year.
And, when a bright future resulting from liquefied natural gas (LNG) projects coming onstream is combined with its P/E ratio of 24.1, it equates to a price to earnings growth (PEG) ratio of just 1.01. Moreover, with dividend coverage of 2.2 times expected in the current year, Oil Search could prove to be an excellent income story over the medium to long term.
Of course, finding the best stocks for the long term is a tough ask – especially when work and other commitments limit the amount of time you can spend trawling through the index for them.
