It is perhaps surprising that the ASX has held up so well in 2015, with the index being up 1% year-to-date despite a plethora of problems having the potential to hurt investor sentiment. For example, the Aussie economy continues to offer little more than an uncertain outlook, China continues to endure a soft landing, commodity prices are at multi-year lows and the situation in the Eurozone appears to be a long way from resolution.
Of course, despite an uncertain outlook on so many fronts, there are a number of stocks that are worth buying. In fact, great uncertainty is a long term investor's best friend, since it means that high quality companies can be bought for an even keener price. Take, for example, Newcrest Mining Limited (ASX: NCM). Its shares have fallen by 8% in the last month alone, yet the company's prospects over the next couple of years are appealing.
In fact, Newcrest is forecast to post bottom line growth of almost 33% per annum during the next two years, as its cost-cutting and a relatively stable outlook for the gold price are set to catalyse the company's performance. However, Newcrest trades on a price to earnings growth (PEG) ratio of just 0.63, which is much lower than the ASX's PEG ratio of 1.25. Furthermore, even if the gold price does fall and Newcrest is forced to write down the value of its asset base, its price to book (P/B) ratio of 1.33 means that downside in its share price is limited as a result of its relatively wide margin of safety.
It's a similar story regarding lending specialist, FlexiGroup Limited (ASX: FXL). Its shares are down by 20% in the last month, with the market seemingly reacting negatively to news that its CEO is to leave the company. However, FlexiGroup should benefit from a lower interest rate (as demand for new loans increases) and, as such, its earnings are due to rise by 9.4% per annum over the next two years. This puts it on a PEG ratio of just 1 and, with FlexiGroup having a superb track record of bottom line growth (net profit has risen at an annualised rate of 14.7% during the last five years), investors in the stock should be relatively confident about the company's ability to meet guidance.
Of course, in the short run FlexiGroup's share price is likely to remain volatile. Uncertainty regarding its strategy under a new CEO as well as a beta of 1.43 indicate that its shares are likely to be more volatile than the wider index in the short term. However, with a dividend yield of 5.8% and with dividends being covered 1.7x by profit, FlexiGroup could be a better defensive play than many investors realise.
And, with the price of gold likely to react positively to uncertainty across the global economy (as it did during the global financial crisis), Newcrest may benefit from improving investor sentiment towards gold stocks moving forward. Furthermore, its beta of 0.83 may provide reduced volatility – especially when compared to its mining sector peers.
