Are Rio Tinto plc, Whitbread plc and Flowgroup plc 3 stocks to avoid?

Whitbread Costa Coffee cup

Increasingly efficient

While shares in Rio Tinto(LSE: RIO) have risen by 30% in the last three months, they are still down by 27% over the past year. This shows just how disappointing the company's performance has been, with the iron ore sector in particular being hit hard by a slowdown in China. And with Rio Tinto having limited diversity in terms of the commodities it produces, many investors may be wondering if it is best to avoid the mining major.

While a lack of diversity is a weakness of Rio Tinto, it has a number of other qualities which make it a strong buy. For example, it has an excellent balance sheet which affords it a degree of resilience which few competitors can match, while its capital expenditure remains robust and highly dependable. Furthermore, Rio Tinto has become increasingly efficient in recent years so as to maintain and develop its competitive advantage over sector peers at a time when iron ore prices have been at decade-long lows.

With Rio Tinto trading on a price to earnings growth (PEG) ratio of just 1, it appears to offer a highly appealing risk/reward ratio. As such, it seems to be an excellent long term buy.

Growing and diversifying

Also disappointing of late have been shares in Costa Coffee and Premier Inn owner Whitbread(LSE: WTB). They have fallen by 12% this year because of investor concern about the state of the UK consumer goods sector, as well as the potential impact of the new living wage. With Whitbread expected to pass much of this additional cost on to consumers via higher prices, there is a worry among some investors that the company's top line performance could suffer.

With Whitbread today announcing that it has taken a 49% stake in health foods company, Pure, it seems to be focused on growing and diversifying its business. And with expansion outside of the UK on the horizon, its long term growth potential seems to be very impressive. As such, Whitbread's PEG ratio of 1.4 indicates that it is a stock to buy, rather than avoid.

A degree of optimism

Meanwhile, shares in Flowgroup(LSE: FLOW) have fallen by over 10% today even though it has not released any major news flow today. Of course, investor sentiment has been weak since the energy services company released its 2015 results last week, with it reporting a wider loss due to the investment it is making in order to grow the business. For example, it is investing heavily in staffing numbers and infrastructure in order to develop a stronger framework for future growth.

Despite this, Flowgroup's revenue increased last year and this should provide its investors with a degree of optimism surrounding its long term future. However, with Flowgroup set to remain in the red in each of the next two financial years, there seem to be better options for investment available elsewhere.

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Peter Stephens owns shares of Rio Tinto. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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