The stock market is ruled by emotion. Certainly, there are a number of investors who are able to put their fear and greed to one side when making an investment-related decision. However, for the most part, the market gets over-excited during a bull market and overly pessimistic when things are not going well.
Part of the reason for this is a fear of missing out on the good times and a fear of being hurt in the bad times. And, while illogical, many investors will take a long, hard look at the past share price performance of companies before investing in them. They may argue that if a share price is rising or falling heavily then the market knows something and, as a result of efficient pricing, it is best to either pile in or stay out, respectively.
As a consequence, many investors are becoming increasingly excited about the prospects for QBE Insurance Group Ltd (ASX: QBE) and Cochlear Limited (ASX: COH). That's because the two companies have delivered stunning share price performance in recent years, with QBE's shares soaring by 31% in the last year and Cochlear's being close behind at up 28% in the last 12 months.
Their stunning capital gains, though, are not reason enough to purchase them. In the case of QBE, investors have been reacting positively to its refreshed strategy that has seen it offload a number of underperforming divisions so as to become leaner, more efficient and, ultimately, more profitable. Evidence of this can be seen in the company's most recent half-year results where cash profit rose by 13% and an increase in dividends of 33% was also announced.
Looking ahead, QBE is expected to continue to post very encouraging results, with its bottom line forecast to rise at an annualised rate of over 27% during the next two financial years. This puts it on a price to earnings growth (PEG) ratio of just 0.66 versus 1.39 for the ASX. Furthermore, QBE is making encouraging progress in turning around underperforming divisions that it intends to keep, with its business now benefitting from an improving risk/reward profile. And, with dividends set to benefit from a decision to raise the company's payout ratio in 2016, it could be yielding as much as 4.5% next year.
Similarly, Cochlear is also going from strength to strength, with its recent update highlighting its improving financial position and the potential for sales rises from new product launches. In fact, this is a key reason why investors have become increasingly excited by Cochlear's future, with new products being the catalyst behind improving top and bottom line performance that is expected to mean a rise in earnings of 16% per annum during the next two years.
This puts Cochlear on a PEG ratio of 2.08 which, while higher than that of the wider index, appears to offer good value for money when Cochlear's long-term growth prospects, financial stability (cash flow has risen by 15% per annum during the last ten years) and low beta status are taken into account. In fact, with the ASX's future being relatively uncertain and somewhat downbeat, Cochlear could stand out as a high growth, lower risk stock due to its excellent earnings growth profile and beta of just 0.5. So, as with QBE, it does not appear to be too late to buy a slice of Cochlear.
