It's difficult to know which stocks to buy right now, since the future for the ASX is uncertain. On the one hand, Chinese economic data released this week was better than expected and the prices of commodities such as iron ore have been given a boost in recent months. However, the threat of a recession remains and, while interest rate falls are good news for Aussie consumers, both investor and consumer confidence continue to be relatively weak.
However, this could be an opportunity to buy when other investors are fearful; thereby obtaining even more appealing share prices and valuations at the point of entry. For example, home consumer goods company JB Hi-Fi Limited (ASX: JBH) trades on a price to earnings (P/E) ratio of just 12.9, which is lower than the ASX's P/E ratio of 15.7 and also well below the wider retailing sector's P/E ratio of 14.4.
Looking ahead, JB Hi-Fi is making numerous changes to its business so as to position itself to take advantage of future growth opportunities. For example, it is in the process of converting a number of its stores into specialised JB Hi-Fi Home stores, with 17 being completed in its most recent financial year. It is aiming to have at least 75 Home stores over the medium term, up from the 43 as at financial year end, as it sees the change as an opportunity to grow customer awareness and market share.
In addition, online sales continue to grow, with a rise of 16.9% reported in the last financial year. Although they represent just 2.4% of total sales, JB Hi-Fi believes that there is significant scope for further growth in this space and, alongside a push into small appliance specialisation in its non-Home stores, the company's sales are due to post positive growth so as to enable net profit to rise by over 5% per annum during the next two years. This, alongside a relatively low rating, indicates upside potential.
Similarly, Commonwealth Bank of Australia (ASX: CBA) trades on a P/E ratio of 14.1, which also offers a discount to the ASX's rating. Furthermore, CBA is now in a financially stronger position following its $5bn capital raising and it now has a pro forma equity tier 1 capital ratio of 14.3%, which places it in the top 25% of international peers in relation to capital levels.
Looking ahead, CBA remains confident in the outlook for the domestic economy as it transitions from a mining boom to a more balanced economy. And, with its bottom line forecast to rise at an annualised rate of 5.9% during the next two years, it appears to be well positioned to cope with short term turbulence in the economy. This should aid dividend growth in the near term and, with CBA yielding a fully franked 5.5%, it offers a superior yield to the ASX by 90 basis points. Furthermore, a beta of 0.81 should provide a relatively stable shareholder experience in the short run, too.
