When the Reserve Bank of Australia began its easing bias in 2011, it knew the likely consequences for bonds, property and equity markets. In 2012 and 2013, dividends stocks reigned supreme as investors fled the poor returns from bank term deposits.
Now, as Australian stocks sit above their historical average prices, rallies will be fuelled by earnings growth. We've recently seen how the market punishes companies who fail to meet earnings guidance, examples include Wotif.com Holdings Limited (ASX: WTF) and Silver Chef Limited (ASX: SIV).
It makes sense that company stock prices will be punished because a stock price is essentially a multiple of profit and when profits aren't upheld, the share price will fall. In 2014 the falls will hit harder because of the lofty earnings multiples many growth stocks currently boast.
However, there will also be some big success stories in 2014 and I believe these next five stand every chance of posting a market-beating return in the next 12 months and beyond.
Collins Foods Limited (ASX: CKF) are franchisors and managers of KFC and Sizzler stores throughout Australia and Asia. Despite its recent acquisitions and potential for significant earnings growth in the near term, it trades on very modest earnings multiples and offers a great dividend.
As a top performer of 2013, rising some 112% in 12 months, many investors may be growing wary of the share price increases of Slater & Gordon Limited (ASX: SGH). However, in this Fool's (capital 'F') opinion, the company's growth in the UK has not yet been fully realised in earnings.
In recent months, Cash Converters International Ltd (ASX: CCV) shares took a backwards step as investors were spooked by a possible law suit and reduced earnings guidance, thanks to regulatory changes to its small-loans business. However, the pullback was a result of the short-term mindset by the market and I believe the company still has a long way to run.
Collection House Limited (ASX: CLH) is another significantly undervalued growth stock which the market has overlooked. However, it appears investors are slowly catching on. It has a market capitalisation of only $227 million, operates in a high-margin industry and its services are always in demand.
Another company which is looking to consolidate its niche market position through both organic and acquisitive growth is Greencross Limited (ASX: GXL). Greencross is a veterinary services provider which aims to undertake two acquisitions every quarter and is also pursuing organic growth in states along the eastern seaboard of Australia. It currently trades on high earnings multiples, so investors will either have to pay-up or hope for a setback in its share price.
Foolish takeaway
In 2014, it's important to find companies which can sustainably grow earnings to avoid the possibility of a pullback in share prices. Thanks to strong cash flows, each of these growth stocks also offer strong dividend yields to add to their appeal.
