While investing in relatively stable and reliable stocks is a sound move, the more risk investors take then the greater the potential rewards. Of course, this is within reason: investing in an ultra-cheap company that is on the brink of collapse is unlikely to yield a positive result, for example. However, having a mix of more dependable stocks as well as ones that could surprise the market can prove to be a sensible move for Foolish investors.
Clearly, the resources sector and the consumer goods sector are not particularly popular at the present time. In the case of the former, a low oil price is apparently here to stay and, as a result, sales and profitability for oil and gas companies are likely to come under pressure. And, with the outlook for the Aussie economy being relatively uncertain and unemployment being higher than desired, consumer goods companies could experience a challenging period as a result of weak demand from shoppers.
However, those two sectors present opportunities to buy stocks with considerable margins of safety. In other words, their valuations fully reflect the challenges that they face in the short to medium term and, for long-term investors, the risk/reward ratio appears to be appealing.
For example, Oil Search Limited (ASX: OSH) has seen its share price fall by 12% in the last three months and, with its bottom line set to rise by 45% in the current financial year, it trades on a price to earnings growth (PEG) ratio of just 1.12. That's less than the ASX's PEG ratio of 1.35 and, with Oil Search recently ramping up its production guidance for 2015, the company may be better able to deal with lower oil and gas prices than many of its peers. That's especially the case since Oil Search is set to create additional efficiencies so that its production costs fall over the short to medium term.
Furthermore, Oil Search is forecast to increase dividends per share by more than inflation at 1.7% per annum during the next two years. This provides an indication that the company's management team is confident in its long-term outlook and also means that Oil Search's 2.4% yield has the scope to improve moving forward.
Meanwhile, JB Hi-Fi Limited (ASX: JBH) has fallen by 10% since the start of June, with poor retail sales figures hurting investor sentiment in the stock. However, with JB Hi-Fi expected to increase its earnings by 5.6% in each of the next two years, its price to sales (P/S) ratio of 0.57 could rise significantly. In fact, JB Hi-Fi currently trades at a significant discount to the wider index, with the ASX having a P/S ratio of 1.43.
And, with the full effect of lower interest rates still yet to be felt (owing to time lags), the medium-term outlook for the consumer goods sector (and for JB Hi-Fi) could be much brighter than is currently being priced in by the market.
Furthermore, with dividends set to rise by 5.2% per annum over the next two years, it sends out a positive signal regarding management's outlook for the business which, alongside a yield of 4.4%, should help to improve investor sentiment in the company during the current loose monetary policy period.
