The majority of investors who decide to select their own stocks would have at least one common goal – beat the market averages!
Why else would you spend time time researching stocks and keeping up to date with the latest market news? You could simply just buy an ETF or a managed fund that tracks the index and you could be comfortable knowing you that your investment return will be similar to the averages without having to expend a great deal of energy.
Stock pickers are different!
Stock pickers look to beat the market averages in two ways. Firstly, by selecting stocks that can outperform the market and secondly, by avoiding those stocks that are likely to underperform and reduce your total return.
So with that in mind, here are three stocks to consider that have a good chance of outperforming the broader market over the medium-to-long term:
1. Automotive Group Holdings Ltd (ASX: AHG) – AHG is Australia's largest automotive retailer with more than 100 dealerships selling new and used cars and trucks. It also is the largest provider of temperature controlled logistic services in the country. AHG reported a solid Financial Year 2015 (FY15) result with underlying net profit after tax (NPAT) increasing by 20%. Importantly, AHG has a proven track record of acquiring new dealerships and integrating them successfully into its business model to drive revenue growth. The company's logistics business is also now benefiting from lower fuel costs and this should start filtering through to its bottom line. Analysts are forecasting for another year of solid growth ahead and investors will benefit from a fully franked dividend yield of 5.5%. There could also be more upside to AHG's share price considering the shares are trading on an undemanding price to earnings ratio of just 12.
2. Challenger Ltd (ASX: CGF) – Challenger is the leading provider of retail annuities in Australia and has recently expanded its presence in overseas markets. The number of baby-boomers set to retire over the coming decade will be a great tailwind for the company as these individuals look for stable and reliable incomes throughout their retirement. The company does a great job of highlighting the volatility and uncertainty associated with other investments and it is likely that more people will have annuities as a part of their retirement investments in the future. Morningstar is forecasting for 12% annuity sales growth in FY16 and this should translate into mid-to-high-single digit earnings growth. With the shares trading at around 12x earnings, Challenger could easily outperform the broader market over the next couple of years.
3. Magellan Financial Group Ltd (ASX: MFG) – Although the fortunes of Magellan are linked to the general performance of the global equity markets, it remains a company that has been able to outperform the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) by more than 1,500% over the past five years. Magellan has built an enviable reputation in the managed funds sector and this has allowed it to become once of Australia's largest fund managers that specialises in foreign investments. The company has been able to consistently grow its funds under management as an increasing number of Australian investors look abroad to diversify their portfolios into investments that are unavailable in Australia. The shares are trading at around 18x FY15 earnings and although this looks fully priced, Magellan remains the highest quality investment in this sector and is likely to outperform when the market recovers.
The three stocks I have mentioned might have a good chance of outperforming the market over the next couple of years but if you want something there's another stock that may give you a market beating return…