2 finance stocks with 20% upside? AMP Limited and Insurance Australia Group Ltd

These 2 finance stocks appear to be worth buying: AMP Limited (ASX:AMP) and Insurance Australia Group Ltd (ASX:IAG)

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With the ASX having risen by just 4% since the turn of the year, many Aussie investors may be feeling a little fed up with the performance of stocks right now. After all, 2014 was a disappointing year which saw the ASX post an increase of less than 2% and, looking ahead, challenges in the commodity market and uncertainty within the domestic economy mean that the outlook for shares among many investors is relatively downbeat.

However, there are a number of stocks that could offer significant gains over the medium to long term. Two prime examples are AMP Limited (ASX: AMP) and Insurance Australia Group Ltd (ASX: IAG), with the two companies offering 20%+ upside moving forward.

In AMP's case, a key reason for this is its strong growth rate. Over the next two years AMP is forecast to increase its earnings per share from $0.29 in financial year 2014 to $0.41 in financial year 2016, which would represent growth of over 41% and works out as an annualised growth rate of almost 19%. And, while AMP's share price has risen by an impressive 20% already this year, the diversified financial services company (which is an insurer, banking specialist and wealth manager) trades at a discount to the wider index, with it having a price to earnings growth (PEG) ratio of 1.01 versus 1.34 for the ASX.

As a result, AMP's share price could rise by a further 20% and still trade at a discount to the wider index, which indicates that there is a good chance that this outcome will be realised over the medium term.

Meanwhile, IAG offers far less impressive growth forecasts than AMP, with its earnings per share set to flat line between 2015 and 2016. However, it has significant upward rerating potential, with its shares trading on a price to earnings (P/E) ratio of 14.7. This is significantly lower than the wider insurance sector's P/E ratio of 18.9 and provides scope for a 20% rise while still maintaining a comfortable discount to the insurance sector.

And, with IAG expected to diversify its regional exposure through expanding into faster growing markets across Asia, sentiment in the company could be positively catalysed even though its short to medium term outlook is somewhat disappointing.

Furthermore, both IAG and AMP offer superb income prospects. In fact, IAG yields a whopping 6%, while AMP's yield of 4.2% is also impressive – especially when you consider that dividends per share are set to rise rapidly in the next couple of years so that AMP yields as much as 4.8% in financial year 2016. This means that, while the RBA kept interest rates on hold this week, demand for high yields such as AMP and IAG is likely to increase moving forward if rates do, as expected, head south.

In consequence, AMP and IAG appear to be great buys at the present time that could deliver gains of over 20% (plus dividends) in 2015 and beyond.

Motley Fool contributor Peter Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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