The appeal of beating the ASX seems to have deteriorated in recent months. That's because, with the index falling by 10% in the last three months, even cash balances are ahead of the ASX's performance. And, realistically, further falls in the value of Australia's main index cannot be ruled out for the rest of 2015.
However, beating the ASX is still a noble aim and, in the long run, its performance is likely to be more akin to that of previous years. Notably, in the 12 years prior to 2015 the ASX posted an annualised return of 5% which, when dividends are added, shows that investing in shares can be a very worthwhile pursuit. That's even when the period in question includes a global financial crisis.
One stock which has the potential to beat the ASX is Commonwealth Bank of Australia (ASX: CBA). This may come as a surprise to some investors, since the Aussie economy may be about to enter a recession and new regulatory capital rules for the major banks may hurt profit growth over the medium to long term.
However, CBA is still expected to grow its bottom line at an annualised rate of 6% during the next two years and also has an excellent track record of growth which should provide its investors with a degree of confidence in its future potential. In fact, CBA has increased its net profit by 7% per annum in the last decade and, with it trading on a price to earnings (P/E) ratio of 13.3 versus 15.2 for the ASX, it appears to have upward rerating potential. This, alongside a yield of 5.9% (fully franked) makes CBA a strong buy for the long term.
Ramsay Health Care Limited (ASX: RHC), meanwhile, continues to enjoy almost metronomic earnings growth. Its business model is extremely desirable and offers the perfect mix of resilience and growth potential, as demonstrated by its near 21% per annum earnings growth forecasts for the next two years.
Certainly, the ASX's 'wobble' in 2015 has affected investor sentiment in Ramsay, with its 5% gain in 2015 being its worst calendar year performance in recent years. This, then, could be a superb opportunity to buy a slice of the business – especially while it is in the relatively early stages of a joint venture in China, which could become the largest healthcare market in the world. And, while Ramsay has a P/E ratio of over 30, it still looks likely to outperform the ASX moving forward.
Similarly, Macquarie Group Ltd (ASX: MQG) is ahead of the ASX in 2015, with its shares rising by 32% since the turn of the year. Investors appear to be bullish on the company's future, with its earnings set to rise by over 11% per annum over the next two years. And, while some investors may feel it is now too late to buy a slice of the business following its share price gains, Macquarie still trades on a price to earnings growth (PEG) ratio of just 1.32, which is below the ASX's PEG ratio of 1.41.
In addition, Macquarie is a stronger and more profitable entity after its aircraft acquisition and, with its asset management and securities divisions performing well, further upgrades to its earnings outlook could follow in the coming months. While a beta of 2 makes it a relatively volatile stock, buying now for the long term seems to be a shrewd move.
