When choosing stocks, it's the company behind the stock that drives the share price in the long term. You want to go over the stock as if you were going to buy the whole business outright and look at the earnings growth capacity and strength of the company.
Billionaire investor Warren Buffett's company Berkshire Hathaway Inc bought shares in IBM several years ago and since then the stock has pretty much gone sideways. Market watchers questioned his stock picking since IBM was falling behind in new trends like social media, cloud computing and internet connectivity.
Recently appearing on the US financial news channel CNBC, Buffett was asked why he bought IBM since the share price hasn't risen in the past several years. He replied he liked what the company was doing, especially buying back shares.
He added that originally he hoped the stock would do nothing for another five years so he could continue buying it as cheaply as possible.
Buffett said, "People have this misconception that when we buy a stock, we like it to go up. That's the last thing we want it to do." Buffett first decides whether the company is worth buying at all. Then, he builds up a position over a long time and takes advantage of any price weakness along the way.
That's a very Foolish way to invest – and a successful one, too.
What ASX stocks have good outlooks but aren't too expensive currently?
Ansell Limited (ASX: ANN), the plastic glove and protective wear producer, is trading at 17 times forward earnings. The company's goods are used and replaced repeatedly in hospitals and various industries, generating a good turnover for the company. Analysts forecast earnings to grow an average 21.3% annually over the next several years. Along with a 2.0% unfranked yield, the stock is at a relatively cheap price now.
CSL Limited (ASX: CSL) is another growing stock that isn't priced at too much of a premium. The biopharmaceutical, which makes blood-related products like blood plasma as well as viral disease vaccines, is expanding overseas and increasing production to meet the high demand for its healthcare supplies. Earnings are expected to grow 20% annually on average in the next two years and the stock trades at a reasonable 26x forward earnings.
Of these two stocks, I would prefer Ansell for its market-leading position in a simple-to-understand industry and better price-earnings to growth (PEG) ratio.
