Beating the index is never an easy task. However, investors able to do that are likely to see the value of their portfolios soar in the long run, since the ASX has posted capital gains of 56% in the last six-and-a-half years, which works out as an annualised rate of 7.1%.
Clearly, not all stocks can beat the wider index, but three companies which have done so in the last year are Macquarie Group Ltd (ASX: MQG), AMP Limited (ASX: AMP) and Amcor Limited (ASX: AMC). Their shares are up by 36%, 4% and 17% respectively while the ASX has dropped by 2% since October 2014.
Looking ahead, all three stocks seem set to continue their index-beating performance. In the case of Macquarie, it is a highly diversified business with operations in areas such as banking, fund management, advisory and other spaces which serves to lower its risk profile versus a number of financial peers. Furthermore, it has a wide geographical spread, which means that an Australian recession may not cripple the company as could prove to be the case with a number of its domestically focused index rivals.
In addition, Macquarie still seems to offer excellent value for money despite its recent share price rise, with it trading on a price to earnings (P/E) ratio of 14.9, which is lower than the ASX's P/E ratio of 15.6. Macquarie is also due to grow its bottom line at an annualised rate of 11% during the next two years, with its lucrative aircraft leasing operation that was purchased for $5.1bn earlier this year set to make a positive impact over the medium term.
Similarly, AMP appears to be on the right track, with its recent results highlighting an improvement in the company's cost:income ratio. It fell by 1.9% to 43.1% versus the first half of 2014 and this provides evidence that the company is becoming increasingly efficient and that its three year business efficiency programme is on track. This includes a move to a new IT system and back office transitions and is expected to lead to $200m in pretax recurring run rate cost savings in return for a $320m upfront investment.
Looking ahead, AMP is forecast to increase its earnings at an annualised rate of almost 20% during the next two years. Despite this, it trades on the same P/E ratio as the ASX of 15.6, which indicates that capital growth is very much on offer alongside a partially franked yield of 4.8%.
Meanwhile, Amcor's focus on innovation is set to have a positive impact on its earnings growth, with the company's bottom line expected to rise by around 6% next year. A key reason for this is acquisitions within its flexible packaging business, with them increasing the company's exposure to faster-growing emerging economies such as Brazil and India. Furthermore, Amcor is eyeing additional acquisitions in emerging countries since it reported that trading conditions across the developed world remain subdued.
Clearly, Amcor has upward rerating potential due to its price to sales (P/S) ratio of 1.31 being below that of the ASX, which has a P/S ratio of 1.37. And, with a possible boost from a weakening Aussie dollar (due to its business being geographically diversified) and the scope for organic growth within developing markets, it seems set to beat the ASX alongside AMP and Macquarie over the medium to long term.
