At the moment, the future of the Aussie economy looks to be challenging. And, even though the RBA would probably like to cut interest rates further, its hands are tied to an extent by a buoyant housing market that could overheat if monetary policy gets much looser.
However, the economy is struggling under the weight of falling commodity prices, slower growth in key export partner, China, and relatively high unemployment levels. In fact, many investors may be puzzled as to why anyone would consider buying stocks at the present time, and also feel confused about why the ASX is at or near to its highest level since 2007.
This, though, could be a great time to buy for the long run since, although things could get worse in the short term, there is huge long-term potential in the valuations of a number of Aussie mega-caps. And, with that in mind, here are three of the best value companies on the ASX.
BHP Billiton Limited
The catalyst that could make BHP Billiton Limited (ASX: BHP) a great investment right now is the spin-off off its non-core assets via new company, South32. This is a smart move by BHP, since it should allow the two companies to create greater efficiencies than when they were combined, and also make the company's asset base easier to manage and co-ordinate.
Certainly, BHP is cheap at the present time, with this being evidenced via a dividend yield of 4.8%. And, while its earnings are likely to fall heavily over the next two years, the quality of the company's balance sheet, its diversity and low cost curves should allow it to ride out the present difficulties in the mining sector and emerge as a stronger business relative to its sector peers.
Rio Tinto Limited
While the collapse in the price of iron ore is a concern for investors in Rio Tinto Limited (ASX: RIO), the potential for Chinese stimulus could cause investor sentiment to improve in the short to medium term. And Rio Tinto remains a very low cost producer which means it is likely to be able to withstand the present challenges within the industry much better than its rivals.
While its share price is likely to remain volatile (especially since Rio Tinto has a beta of 1.38), it could be a good time to buy, as evidenced by a dividend yield of 5.1%. And, with Rio Tinto's dividends being covered 2.4 times by profit last year, its current payout could be more sustainable than many investors realise.
CSL Limited
One major beneficiary of the present challenges in the Aussie economy is likely to be pharmaceutical company, CSL Limited (ASX: CSL). It has sizeable operations outside of Australia, so the weakening Aussie dollar is good news for the business and could act as a turbo boost on CSL's earnings.
Furthermore, CSL trades on a price to earnings growth (PEG) ratio of just 1.3 at the present time, which is significantly less than the ASX's PEG ratio of 2.4. And, with CSL's top and bottom lines being relatively uncorrelated with the wider economy, investor sentiment in CSL could pick up should the present challenges worsen over the medium term.
Of course, finding the best stocks for the long term is a tough ask – especially when work and other commitments limit the amount of time you can spend trawling through the index for them.
