A common theme among investors is a desire to beat the market. The question is: how do you go about doing it?
Clearly, there is no silver bullet; no catch-all formula that guarantees that your portfolio will beat the ASX. Rather, there are numerous strategies and approaches that may have the potential to deliver index-beating performance but, of course, what every company usually needs in order to perform well is a catalyst. This could be in the form of above average earnings prospects, an unjustifiably low valuation, or dividend potential that holds great appeal.
And, with that in mind, here are three stocks that all appear to have a clear catalyst which could allow them to beat the ASX over the medium to long term.
AMP Limited
With the Aussie economy enduring a challenging period, it seems likely that further interest cuts are on the horizon. Certainly, an interest rate of 2.25% is low by historical standards, but compared to other developed nations across the globe, it could fall much further over the next few years. As such, companies that offer bright income prospects could find their shares bid up by dividend-hungry investors.
That could prove to be the catalyst for diversified financial company, AMP Limited (ASX: AMP). It currently yields 4.3%, but is forecast to increase dividends per share by 7.4% in 2016, which puts it on a forward yield of 5%. And, with dividends set to be covered 1.34 times next year by profit, AMP has ample headroom when making shareholder payouts. This increases the sustainability of its dividend and should allow it to rise even if profit growth is somewhat underwhelming.
CSL Limited
At a time when stunning bottom line growth is becoming something of a rarity, CSL Limited's (ASX: CSL) superb growth potential could be the catalyst that pushes its share price higher. That's because the pharmaceutical company is expected to increase its bottom line at an annualised rate of 20.2% over the next two years, with its track record of growth highlighting that its forecasts are unlikely to be overly optimistic.
In fact, CSL has been able to post growth in net profit of 21.4% per annum during the last 10 years and, when you combine this with a beta of just 0.6, the defensive nature of the stock is evident. And, with a price to earnings growth (PEG) ratio of 1.24, CSL's valuation compares favourably to the ASX's PEG ratio of 2.35.
Insurance Australia Group Ltd
While the NSW thunder storms may pin back investor sentiment in Insurance Australia Group Ltd (ASWX: IAG) in the short run, its current valuation may be the reason for improved share price performance in the long run. For example, IAG trades on a price to earnings (P/E) ratio of just 11.9, which compares favourably to the ASX's P/E ratio of 16.7 and also to the insurance sector P/E ratio of 19.3.
Furthermore, IAG has an excellent track record of earnings growth, with the company's bottom line having risen at an annualised rate of 43.3% during the last five years. This, when combined with a dividend track record of growth of 31.3% during the same time period, means that IAG also yields a whopping 6.4% yield, which could prove to be an additional catalyst to push its share price higher over the medium term.
