According to Morningstar, the three best performing blue-chip stocks (in this case, a market capitalisation of more than $5 billion) over the past five years are TPG Telecom Ltd (ASX: TPM), REA Group Limited (ASX: REA) and Ramsay Health Care Limited (ASX: RHC).
The performance of these three companies has been quite exceptional and to put this in perspective, the graph below demonstrates the outperformance of these companies against the S&P/ASX 200 (Index: ^AXJO)(ASX:XJO) over the last five-year period.
It is interesting to note, that each company operates in a very different sector and all three have been able to create competitive advantages that have driven earnings growth over many years.
Although these companies have been successful in the past, investors should never base their investment decision solely on past performance. We all know the saying – "past performance is not a guarantee of future performance".
It is up to the investor, therefore, to determine if each of these companies can replicate their earnings history going forward.
With those points in mind, here is a quick rundown of each company and their earnings outlook:
TPG Telecom
There has been an increased level of merger and acquisition activity in the telecommunications space recently and this has helped to drive the share prices higher of a number of companies in the sector. TPG has been no exception to this, with its takeover of iiNet Limited (ASX: IIN) now approved and set to cement its position as the second largest telco company on the market. Its stellar financial year 2015 (FY15) result, along with a new $1 billion agreement with Vodafone, has seen the share price trade as high as $11.06.
Many investors will be asking – can the share price continue to track higher when the stock is already trading on a price-to-earnings (P/E) ratio of 38 and a dividend yield of just over 1%?
It is a hard question to answer considering TPG is likely to continue to deliver strong growth figures for the medium term at least. Personally, I think the shares are over-valued at these levels and my preferred stock in this sector continues to be M2 Group Ltd (ASX: MTU).
REA Group Ltd
REA Group remains the clear market leader in the residential property listing market in Australia and has a number of strategic international investments that are now gaining traction.
Although the market has been concerned with a reduction in listing volumes recently, REA Group was still able to deliver a 24% increase in earnings for FY15. In addition to this, REA Group is expected to deliver double-digit earnings growth for at least the immediate future and is likely to benefit from increasing listing volumes as more owners try to take advantage of the strong residential property market while it lasts.
The share price of REA Group has rebounded strongly over the past month with the shares now trading at just over $45 per share. Despite a current valuation of 29x FY15 earnings, I still think the company is reasonably valued for long-term investors.
Ramsay Health Care Limited
Ramsay is my preferred exposure to the ageing population thematic that is occurring globally. Importantly, Ramsay is expanding its network of private hospitals throughout Australia, Europe and Asia to take advantage of this long-term tailwind.
The company has proven it can expand and replicate its operations successfully overseas and this will provide the company with numerous growth opportunities moving forward.
The company is forecasting another solid year of growth ahead and will benefit from cost synergies from recent acquisitions. At a P/E ratio of nearly 30, the shares appear expensive, but I think the shares will trade substantially higher than this over the longer term and investors could take the recent pull-back in the share price as a buying opportunity.
Right now, the market pull-back has created some even better buying opportunities…
