With the ASX falling by 6% in the last year, there is understandably a degree of pessimism among Aussie investors at the present time. After all, it is very disappointing to see your hard-earned cash deliver a negative return even after spending hours researching the right companies and the right sectors.
However, there is cause for a significant amount of hope for the long term. Clearly, there are a number of economic challenges being faced at the present time, with weakness in China, declining commodity prices and higher than desired unemployment levels all contributing to a negative mood among investors. However, history tells us that it is at such times that buying opportunities are at the most appealing and abundant. Therefore, while most other investors are counting their losses, it could be time to invest in high quality ASX stocks and, with that in mind, here are two of my top picks.
Rio Tinto
On the face of it, Rio Tinto Limited (ASX: RIO) may seem like a rather risky choice. After all, the iron ore price has fallen to a 10-year low and the company is expected to see earnings per share fall from $6.19 last year to just $3.03 in the current financial year. That's a fall of 51% and it has hurt investor sentiment in Rio Tinto, with the company's share price being down by 24% in the last year.
However, Rio Tinto has always been at the mercy of the iron ore price. That's a fact of life for all mining companies and sometimes it works to their advantage, other times (like now) it works to their disadvantage. The key takeaway, though, is that commodity prices are unlikely to remain so low in the long run, since the emerging world still has vast industrialisation to commence and such a low price is likely to be unsustainable for a number of producers, thereby reducing supply over the medium term.
As a result, buying now seems to be a logical move. That's especially the case since Rio Tinto has sound finances, excellent cash flow and has a dividend that yields 5.6% and is covered 1.15 times by profit.
JB Hi-Fi
Similarly, the outlook for retailers such as JB Hi-Fi Limited (ASX: JBH) is also rather bleak. It is being hurt by wavering consumer confidence which, in the short run at least, appears set to continue. However, JB Hi-Fi's valuation appears to take this into account, with the company's margin of safety being sufficiently wide to merit purchase right now.
For example, JB Hi-Fi trades on a price to earnings (P/E) ratio of 14.6, which is lower than the ASX's P/E ratio of 15.3. And, when focusing on the company's top line, rather than bottom line, it offers an even bigger discount versus the index, with JB Hi-Fi having a price to sales (P/S) ratio of 0.55 versus 1.39 for the ASX.
Furthermore, JB Hi-Fi has an excellent track record of increasing sales, with them rising at an annualised rate of 16.8% during the last 10 years. This, combined with its considerable diversity and wide margin of safety, means that it appears to be worth buying, alongside Rio Tinto, for the long haul.
