Despite huge dividend yields and leading market positions, shares of Australia and New Zealand Banking Group (ASX: ANZ), G8 Education Ltd (ASX: GEM) and Rio Tinto Limited (ASX: RIO) have each underperformed the market in 2015.
That's despite the Reserve Bank of Australia (RBA) dropping official interest rates to just 2.00% and the release of a vote-winning federal budget earlier this month.
So, after months of underperformance, are these stocks good value? Or should you avoid them entirely?
Here's what I think you can expect from Rio Tinto, ANZ Bank and G8 Education shares in the future…
ANZ Bank
Whilst its peers were posting lacklustre results, ANZ was the only big bank to release a mildly positive half year report earlier this month. ANZ is unique amongst Australia's Big Four banks because it is the only one actively seeking to grow in Asia. Launched in 2007, its Super Regional Strategy has tracked along nicely thus far, with its Asia, The Pacific, Europe and Americas (APEA) markets, currently accounting for over 20% of group profit.
However whilst ANZ's Asian strategy bodes well for long-term profit growth its shares are not cheap at today's prices. Moreover although it is one of the most profitable banks in the local market, the domestic banking sector is expected to come under intense pressure in coming years as the Australian economy slows. Personally, I'm holding off buying ANZ shares at today's prices.
G8 Education
G8 Education is Australia's leading publicly-listed childcare centre owner and operator, offering 32,782 places through a network of 455 centres at 31 March 2015. Operating under a multi-brand strategy, G8 Education has grown impressively through acquisitions and its share price followed suit – at least until recently.
Not long ago, G8 Education's growth strategy was thrust into the spotlight with a number of analysts suggesting its roll-up model struggles to add significant value for shareholders and simply exploits pricing mismatches between private and public markets.
Although there is merit to that argument, I continue to think G8 Education shares look cheap at today's prices. It currently trades on a forecast price-earnings (PE) ratio of 14 and dividend yield of 6% fully franked (8.55% grossed up).
Rio Tinto
Rio Tinto shares have significantly underperformed the market over the past five years, yet do not appear good value today. Rio Tinto shares did exceptionally well in the lead-up to the global financial crisis in 2008 but now the prices of many of its commodities are falling in the wake of a slowing Chinese economy.
As I noted here, despite its share price falls over the past 12 months, the risk-reward trade-off probably isn't favourable for potential Rio Tinto investors right now. Whilst it's unlikely to go broke in a lower price environment (it boasts industry-leading breakeven costs), the risk of capital loss (i.e. a falling share price) is real.
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As an individual investor I aim for market-beating returns, not just so-so investment ideas like Rio Tinto. Whilst Rio will continue to make money if (when) commodity prices do fall; this doesn't make its shares a market-beating investment.
On the other hand, although risks persist, I think G8 Education has a desirable combination of characteristics which make it a compelling investment today. These include a big dividend, cheap share price, growing profits and savvy management team.
