For investors in Newcrest Mining Limited (ASX: NCM) and QBE Insurance Group Ltd (ASX: QBE), the last few years have been challenging. That's because they have had to make changes to their businesses which, in the short run, have been painful and have caused their financial performance to be somewhat disappointing. As such, their share prices fell by 73% and 38% respectively from 2011 until 2014, which is well behind the ASX's rise of 14% during the same time period.
However, since the turn of the year, both companies have posted index-beating returns. Certainly, Newcrest's rise of 0.6% is hardly astounding but, when it is kept in mind that the ASX has fallen by 7% year-to-date and the wider resources sector has performed dismally, even a small rise is a positive result. Meanwhile, QBE's valuation has soared by 13% since the start of the year.
The key reason for the change in performance for both stocks is improving profitability and rising investor sentiment. In the case of Newcrest it has become more efficient, leaner and much more profitable. In fact, its bottom line increased by over 21% last year and, looking ahead, it is expected to rise at an annualised rate of 23.8% during the next two years. And, while the price of gold recently hit a five-year low, concerns surrounding China and the global economic growth outlook could mean that the precious metal's price performs surprisingly well.
Similarly, QBE has adopted a much improved strategy. It has refocused the business on its most profitable operations and sought to dispose of assets which are deemed non-core and surplus to requirements. This is a tried and tested method of increasing efficiencies and adding shareholder value, with the result being QBE swinging from loss to profit and being expected to increase its earnings (on a per share basis) by 54% over the next two financial years.
Due to their strong growth potential, both stocks trade at discounts to the ASX's price to earnings growth (PEG) ratio of 1.34. For example, Newcrest has a PEG ratio of just 0.68, while QBE's PEG ratio stands at 0.65. As such, they both appear to offer wide margins of safety so that even if their turnaround strategies stutter or there are unforeseen problems, the performance of their shares could still be relatively impressive.
And, while their past performance may have been disappointing, both Newcrest and QBE could offer a degree of stability to their investors during the current uncertain outlook. That's because they have betas of 0.83 and 0.55 respectively, which mean that their share prices should move by less than the ASX, thereby providing downside protection should the ASX's 2015 fall continue.
So, while neither stock is yet back to full health, they are most certainly well on their way and, with appealing valuations, strong growth potential and sound strategies, now seems to be the perfect time to buy both of them.
