For many investors, trends are a hugely important factor in their investment decision making. For example, if a company's share price has risen by a large amount, it is often stated that the company is on an upward trend and it is, therefore, a good time to buy. Similarly, it is often said that catching a falling knife is very difficult and, as such, falling share prices should be avoided.
However, such views can lead to investors becoming part of a herd mentality. While this can seem like a good idea in the short run, it can lead to a lack of long-term strategic thinking in terms of whether a company is good value for money given its forecasts and growth prospects. As such, it can sometimes pay to follow trends, but other times avoiding them and being a contrarian investor can be the best option for Foolish investors. In other words, it is very much best viewed on a case-by-case basis.
Of course, stocks such as Macquarie Group Ltd (ASX: MQG) and Super Retail Group Ltd (ASX: SUL) appear to be trending at the present time. Their shares are both up by 35% year-to-date and, as such, it could be argued that investor sentiment is with them and that they have good momentum.
This strong performance, though, is not reason enough to buy either stock. However, they both have excellent future prospects with, for example, Macquarie all set to increase its earnings by 9.4% per annum over the next two years. Despite this, it still trades on a price to earnings (P/E) ratio of 15.5, which is only slightly higher than the ASX's P/E ratio of 15.4 and equates to a price to earnings growth (PEG) ratio of 1.65. This indicates that growth is on offer at a reasonable price and, alongside a partially franked yield of 4.4%, Macquarie appears to offer a mix of growth, value and income that should push its share price higher over the medium term.
In addition, Macquarie's financial standing appears to be very sound. Evidence of this can be seen in the fact that the company recently announced it would be able to meet the new regulatory capital requirements for banks through internal funds, rather than have to raise capital externally from investors. As such, Macquarie's earnings may not be diluted due to capital increases, which could be a challenge faced by its banking peers in future.
Similarly, Super Retail has bright future prospects, too, with it set to grow its earnings by 8% per annum during the next two years. However, this growth rate could be given a boost by improving consumer sentiment. Certainly, in recent months consumers have been relatively pessimistic but, with interest rate declines from earlier this year expected to have an impact later this year and into 2016, Super Retail could gain a boost in its sales and earnings.
Furthermore, Super Retail has an excellent track record of bottom line growth, with its net profit rising at an annualised rate of 15% during the last 10 years. In addition, it has increased dividends by 23.2% per annum during the same period, which means that it now yields a fully franked 4% and, with a price to sales (P/S) ratio of 0.91 (versus 1.38 for the ASX) it seems to be worth buying at the present time.
