As investors gear up for the majority of ASX-listed companies to report their profit results over the next four weeks, it is likely that we will soon have a feel for whether the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) will have another crack at the 6,000 level again this calendar year or not.
While the general direction of the market may be important to passive investors who rely primarily upon the long-term trend of higher equity market levels; for active investors it is more important to pick winning stocks.
Numerous ways to outperform
While owning growth stocks such as Ramsay Health Care Limited (ASX: RHC) can be one way to outperform in any market environment due to positive earnings growth, the potential problem with this approach is that an investor may pay above fair value for this certainty of growth – ultimately this can be a drag on a portfolio.
For this reason it can be better to focus on owning undervalued stocks. These stocks can re-rate closer to fair value under any market condition including during reporting season when a better-than-expected result or outlook statement can help rebuild confidence in a stock.
Here are three stocks I'll be watching this reporting season.
- G8 Education Ltd (ASX: GEM) – The childcare provider is forecast to grow earnings per share (EPS) by 12.9% in financial year 2016 which implies a price-to-earnings (PE) ratio of 12.1x. A dividend of 24.6 cents per share (cps) is also forecast which implies a fully franked dividend yield of 7.2%.
- Flight Centre Travel Group Ltd (ASX: FLT) – The travel agency is expected to grow EPS by 7% and pay a full year dividend of 155.4 cps which would place the stock on a PE of 12.1x and yield of 4.4% respectively.
- JB Hi-Fi Limited (ASX: JBH) – The electronics retailer is forecast to grow earnings per share by 9%, suggesting a PE of 13.6x. With a forecast dividend of 92.9 cps the stock's yield is a potential fully franked 4.8%.
Valuation
Compared with the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO), these three stocks are all trading on a higher EPS growth rate, a lower PE and higher dividend yield than the index. From a comparative point of view this certainly makes these three stocks appealing.
