One of the challenges of being an investor is knowing when to buy and when to sell. Clearly, nobody knows exactly what is going to happen in future and so the task is, in some ways, rather impossible to execute perfectly. As such, it makes sense to forget worrying about timing the market, and instead focus on buying high quality stocks when they appear to be trading at a discount to their intrinsic value. As a result, the risk/reward ratio should be very much stacked in the investor's favour, although it can take time for high quality stocks to come good.
A prime example of this is QBE Insurance Group Ltd (ASX: QBE). It has been one of the star performers during 2015, with its shares having posted a rise of 17% since the turn of the year, which is 23% ahead of the ASX's return in the same time period. However, QBE has not always been the darling of the financial world, prior to this year it struggled with an inefficient business model, a lack of focus on its most profitable areas and dwindling confidence from investors regarding its guidance, which was often downgraded.
Today, though, QBE is an entirely different animal, with net profit growing by 390% last year and expected to continue its upward momentum with growth of 31% this year and 20% next year. As a result, investor sentiment could rise even further and, with QBE trading at only a small premium to the ASX's price to earnings (P/E) ratio of 14.8 (QBE has a P/E ratio of 15.9), it could realistically see its rating expanded. That's especially the case since growth is becoming more difficult to come by as the Aussie economy has the potential to move into a recession.
Diversified financial company, Macquarie Group Ltd (ASX: MQG), also has excellent growth prospects. Unlike QBE, its performance in previous years has been impressive, with its earnings per share having risen by over 9% per annum during the last five years. Looking ahead, this rate of growth is set to be maintained over the next two years, which indicates that the company's current P/E ratio of 14.7 could be rerated higher.
Furthermore, Macquarie's income prospects remain hugely appealing, with it having a track record of increasing shareholder payouts by 12.5% per annum during the last five years. While in the next two years they are set to roughly equal the rise in net profit, Macquarie could realistically post dividend growth of 10% during the next two years. This adds to its appeal – especially at a time when interest rates are likely to move lower.
Similarly, Australia and New Zealand Banking Group (ASX:ANZ) remains a very appealing income choice, with it having a yield of 6.5%, which is 160 basis points higher than the ASX's yield.
Although requirements for increased regulatory capital coupled with a slowing Aussie economy mean that profit growth is set to be limited (growth in earnings of just 0.2% per annum is forecast over the next two years), ANZ offers a wide margin of safety. For example, it trades on a P/E ratio of just 10.5 and, with dividends being covered 1.4 times by profit, it appears to be a very cheap and reliable income play. Additionally, with a beta of 0.9, it may prove to be a welcome counterweight against increased market volatility, too.
