Investors are constantly flooded with information — how do we know what data really matters when considering a stock to buy?
I focus on two main factors: intrinsic value and prospects. Intrinsic value is what the stock worth today, based on its balance is sheet, risk and management. Prospects are the driving forces that will increase the value of shares in the future.
Large companies, such as BHP Billiton (ASX: BHP) and Commonwealth Bank (ASX: CBA) are thoroughly researched by many analysts, resulting in a generally accepted idea of their intrinsic values. So the potential growth in stock price needs to be assessed according to known and expected prospects.
BHP's prospects could encompass the price of its commodities and growth in markets that need those commodities. For Commonwealth Bank, it might be the change in interest margin (i.e., the difference between what the bank can get by lending and the cost of capital), expansion in the home lending market, etc. My focus is mainly on the prospect side of the coin, the factors driving future growth.
Reasons to be optimistic
Sentiment plays a large part in the direction of markets. Although the business cycle is easy to discern with hindsight, it's difficult to recognize looking forward. However, with an ongoing bull market in major markets overseas, especially the United States and protracted, very low interest rates and easing of stimulus programs overseas, suggesting economic improvement, there are good grounds to be optimistic.
In Australia, after several years in the doldrums, the housing market in capital cities is now fairly robust. That alone creates confidence, and growth in demand for all sorts of things in the in the wider market.
3 stocks with outstanding prospects
In online sales, Seek (ASX: SEK) is in a class of its own. Its track record over recent years shows excellent growth in earnings per share. Earnings for the years ending June 2010 to 2013 have been 26.6 cents, 28.9 cents, 30.6 cents and 40.9 cents, respectively, with projected earnings of 47.9 cents for 2014 and 55.1 cents for 2015.
It is well placed in the jobs market, and has a growing presence in education. In addition it is starting to penetrate the Chinese market, where there is substantial growth opportunity. So far, Seek has not put a foot wrong, and should continue to reward its shareholders. I'd buy this one at current prices.
In telecommunications, Amcom (ASX: AMM) is a standout performer with excellent growth prospects in the western half of the continent. Earnings per share have grown consistently upwards from 3.4 cents in 2010 to 8.4 cents in 2013, and are estimated to be 10.0 cents in 2014 and 17.0 cents in 2015. The biggest question for this stock, is how good is its moat in the west (in other words can it continue to remain competitive). I'd also buy this one at current prices.
My favourite telecom on the east coast is TPG Telecom (ASX: TPM), which also has a strong presence in New Zealand, having recently announced that it will acquire AAPT and Powertel from Telecom Corporation of New Zealand (ASX: TEL). Again, the past and future earnings are all positive. Past were 7.6 cents, 10.1 cents, 11.5 cents, 18.8 cents in 2010, 2011, 2012 and 2013, respectively; and future projected earnings are 21.6 cents in 2014 and 25 cents in 2015. This is another one to consider at current prices.
Foolish takeaway
So, looking at just the past and future earnings per share, one online and two telecom companies shine brightly for their prospects this year, and for many years into the future.
