LONDON -- If a previously struggling business recovers, the market is forced to reassess its convictions. This can result in buyers piling in and the shares rising sharply. However, if things continue to get worse, investors could get wiped out.
Here are three FTSE 100 recovery plays.
Two things will shape BP's share price over the next year: the Gulf of Mexico disaster, and the new Rosneft deal. Today's share price tells me that the market is still worrying about the future size of fines that BP may have to pay for its role in the 2010 Macondo disaster.
However, if any further settlements are modest, sentiment would likely turn upwards. Analysts would begin to look in more detail at the opportunities presented by BP's new deal with Russian state oil company Rosneft.
At today's price, the shares trade on a 2013 price-to-earnings (P/E) ratio of 8.1, falling to 7.3 times forecast earnings for 2014. A 5.9% dividend yield is forecast for 2013.
Royal Bank of Scotland
If I am right, there are still big gains to come from RBS in 2013.
With its interim results, Royal Bank of Scotland reported a net asset value per share of 476 pence. As a general rule of mine, profitable companies should not trade at a discount to this figure. If RBS can convince the market of its long-term profitability, there is further upside potential of 37% to the last reported book value.
Remember that in a profitable company, book value will normally be increasing. This means that more shareholder value is being created and could inspire further rises.
Wm. Morrison Supermarkets
Wm. Morrison Supermarkets' shares are close to the cheapest that they ever have been. Earnings per share (EPS) of 26.5 pence, and a dividend of 11.7 pence, is forecast for 2013. This puts the shares on a P/E of 9.8, with an expected yield of 4.5%.
Morrisons was previously regarded as the growth play in the supermarket sector. Between 2007 and 2010, net profit at the company doubled. EPS increased nearly threefold.
However, recent market surveys have shown Morrisons losing market share. Now, much lower growth is forecast. Recent share price action -- the shares are close to a four-year low -- suggests that investors believe profits could soon go into decline. If you are confident that the dividend will be maintained, buying the shares now could be a wise move if management can inspire a turnaround in sentiment.
However, you might believe that there are better dividend investments available. Our analysts here at The Motley Fool have prepared a report on one such alternative. At its current price of about 700 pence, this share yields more than Morrisons -- a mighty 5.7%, in fact.
Indeed, one top analyst at the Motley Fool calculates the fair value of this alternative share could be 850 pence -- and has even declared the company to be his "Top Income Stock of 2013." If you wish to know more about this 5.7% yielder, simply click here, and enjoy a new Fool special report -- it's 100% free.
The article 3 Shares With Significant Recovery Potential originally appeared on Fool.com.David O'Hara owns shares in Royal Bank of Scotland, but none of the other companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.