One 'recovery' stock I'd buy, and one I'd avoid
With the FTSE 100 trading close to an all-time high, it can be difficult to know whether now is the right time to buy or sell shares. After all, given the relatively high political risks present in Europe, the index could move sharply in either direction in the short run. That's why it could be prudent to buy stocks which offer a clear positive catalyst to boost their share price. This means they could perform well even if the wider market fails to rise.
With that in mind, here is one stock which may be worth buying, and one that seems to be worth avoiding right now.
Tuesday's update from Amec Foster Wheeler(LSE: AMFW) showed that the company is making good progress ahead of its expected merger with Wood Group. Amec Foster Wheeler delivered robust performance in what remains a challenging industry in which to operate. The energy support services company ended the year with its net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) covenant ratio at 3.3x. This is within the restated covenant agreed with lenders of 4.5x.
The company's non-core asset disposal programme is on track and this could help to improve its risk/reward ratio. Cost-saving measures may also improve its financial performance, while the expected synergies from the Wood Group merger may lead to a stronger combined entity in the long run.
Certainly, the Oil & Gas industry remains highly uncertain and volatile. However, with the scope for a rising oil price over the medium term as supply reductions start to bear fruit and a sound business model, Amec Foster Wheeler could be a relatively strong performer. Therefore, buying it now in return for an expected 0.75 shares (for each Amec Foster Wheeler share) in the new Wood Group could prove to be a shrewd move.
While the outlook for the energy sector is uncertain, there are a number of high-quality stocks with improving profitability trading at low valuations. Therefore, there seem to be a number of opportunities to profit in the long run. This means that investors may not need to buy higher risk shares, or stocks which are failing to deliver profitable performance at the present time. The opportunity costs of buying such companies may be high.
One such company is Velocys (LSE: VLS). It is focused on producing synthetic fuels, which could prove to be a highly profitable space. In fact, in its half-year results the company said it was making good progress with the commissioning and operational start-up of the ENVIA plant, while strategy changes and prudent cost management could help to improve its financial performance over the medium term.
However, with it forecast to remain a loss-making entity in each of the next two years and being a relatively small company, there may be superior risk/reward opportunities elsewhere within the energy sector. Velocys may lack the size and scale advantages of larger sector peers, while the potential for improvements in the outlook for the wider energy sector could lift the valuations of stocks which are able to generate rising profitability in the next couple of years.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.