The prospect of a stock market rally means that UK shares could deliver improving performances after a tough 2020. Yes, it may take some time for economic conditions to improve and for investor sentiment to do likewise. But buying undervalued shares today could be a means of benefiting from a new long-term bull market.
With that in mind, here are two FTSE 100 stocks that appear to offer wide margins of safety and long-term recovery potential following their recent share price slumps.
An undervalued FTSE 100 share for the stock market rally?
Shell’s (LSE: RDSB) share price has recovered to some extent in recent weeks, as the prospect of a stock market rally has become clearer. However, it is still down 50% since the start of the year.
The company has faced challenging operating conditions for much of the year. They have been the main cause of declining profitability. However, the oil and gas producer recently set out a plan to introduce a new cash allocation framework that it expects to provide sufficient investment in low-carbon assets to transform its long-term financial outlook.
Shell plans to reduce debt, while following a progressive dividend policy. It expects to make major cost savings in areas such as headcount reduction that could produce a leaner and more profitable business in the coming years.
Certainly, the company’s near-term outlook is challenging. It could experience further share price declines if there is a second crash prior to a long-term stock market rally. However, its 5% dividend yield and potential to evolve its business model in the long term could mean that it benefits from a likely bull market that lifts valuations across the FTSE 100.
A dirt-cheap stock with recovery potential?
Landsec (LSE: LAND) is another FTSE 100 share that has declined significantly in price this year, but which could offer recovery potential in a stock market rally. It is currently trading over 30% lower than it was at the start of the year.
Investors have become more cautious about the prospects for commercial property businesses. Low demand for retail and office units as a result of changing trends caused by the coronavirus pandemic, as well as troubled operating conditions for current tenants, have led investors to demand wide margins of safety across the sector.
For example, Landsec now trades on a price-to-book (P/B) ratio of just 0.6. This suggests that investors are pricing in further challenges for the business. While they may occur in the short run, the company’s solid balance sheet and a likely economic recovery mean that it could experience improving operating conditions.
Therefore, its wide margin of safety may provide scope for significant capital gains over the long run in a stock market rally. It may be a major beneficiary of improved investor sentiment in a new sustained bull market.
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While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.
That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.
Peter Stephens owns shares of Landsec and Royal Dutch Shell B. The Motley Fool UK has recommended Landsec. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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