Following on from a lacklustre 2014, investors had been hoping for a strong start to the year. Unfortunately, that hasn't come to fruition just yet with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) having retreated 1.1% – wiping out all of last year's measly gains.
As is always the case, there are mixed beliefs about how the Australian share market will perform over the course of the year. While Credit Suisse has suggested the index could climb to 6000 points, others have suggested the oil crisis, a falling Australian dollar and slowing Chinese growth could all hinder its progression.
If there is one thing I think is for certain, investors will need to be on their A-game to perform well in this market. With some of Australia's biggest and most popular companies trading at outlandish prices, it's as important as ever to choose your investments wisely. With that in mind, here are four stocks to avoid and four companies worth your consideration:
Avoid:
- Commonwealth Bank of Australia (ASX: CBA). The bank has delivered enormous returns to shareholders in recent years, but its shares are by no means in 'buy' territory. The bank's earnings could come under considerable pressure in the coming years and a buy today could result in years of market underperformance.
- Telstra Corporation Ltd (ASX: TLS). Like Commonwealth Bank, Telstra's shares just aren't cheap enough to warrant a 'buy' today. Although the stock offers a very nice dividend yield, investors will likely realise better returns from other high-yielding stocks with greater growth potential.
- BHP Billiton Limited (ASX: BHP). Having lost nearly one third of its value since August, BHP Billiton's shares are certainly looking tempting. While it deserves a position on your watchlist, the stock could continue to fall should iron ore and oil prices retreat any further. Until the volatility in the sector comes off, an investment in BHP Billiton today remains too risky.
- Medibank Private Ltd (ASX: MPL). The health insurer has garnered plenty of attention since floating in November, but this hype appears to have been priced into the company's shares. While I like the company, there is too much riding on its ability to cut costs and improve margins to justify its current valuation at $2.34 per share.
Opportunities:
- Woolworths Limited (ASX: WOW). Unlike the blue-chip companies mentioned above, Woolworths would be an excellent addition to your portfolio today. Fears of heightened competition from Costco and Aldi, as well as concerns over the growth of its Masters Home Improvement chain, have been exaggerated giving long-term investors the perfect opportunity to stock up. Right now, it's expected to yield 4.7% this financial year, fully franked, making it an even more compelling prospect.
- Coca-Cola Amatil Ltd (ASX: CCL). It's been a tough run for shareholders of the beverage manufacturing giant but their fortunes could finally turn around in 2015 with the company appearing to be back on track. While there is still a chance of further falls, the stock looks very compelling at its current price.
- Collection House Limited (ASX: CLH). Despite its strong growth prospects and ripper dividend yield (4.3%, fully franked), the stock is still trading on a forecast price-earnings ratio of just over 12. The debt collection business has a strong track record for revenue and earnings growth – a trend I expect to continue over the foreseeable future.
- Nearmap Ltd (ASX: NEA). The small-cap provider of geospatial mapping technology has done extraordinarily well in the Australian market and is currently ahead of schedule in its highly anticipated expansion into the U.S. market. Since peaking at 83.5 cents in November, the stock has trended back to 58 cents giving investors the perfect opportunity to stock up on what could potentially be a 'multibagger' over the coming years.
There's one more company which could deliver even greater returns in 2015 and in the years to follow.
