One thing that the market usually rewards over a period of time is top notch growth stocks. In other words, companies that are able to grow their profits at a superior rate to the market. Certainly, stocks which pay growing dividends, that offer stability and an excellent track record can also be rerated upwards, but the market seems to love higher growth stocks and rewards them with valuations in excess of the wider index.
Furthermore, with there being a lack of strong growth stocks at the present time owing to the downbeat outlook for the domestic economy, it could be argued that stocks offering double-digit growth are worth an even higher premium than usual. After all, they are relatively scarce and, looking ahead, could gain from having a scarcity value.
One example of such a company is Telstra Corporation Ltd (ASX: TLS). It has endured a challenging number of years, with its bottom line growing at an annualised rate of just 3.3% during the last ten years. And, with its net profit due to be just 1.7% higher for the current financial year, investor sentiment has been rather downbeat during the course of 2015 and Telstra's shares have fallen by 7% as a result.
Looking to next year, though, Telstra is expected to post a rise in its bottom line of almost 14% and, looking beyond that, it has a sound growth strategy which includes shifting its footprint outside of Australia and towards faster growing markets in Asia. This should allow Telstra to tap into the long term growth potential in a region where communication demands are set to soar as a result of a rising population and increasing wealth. Furthermore, Telstra is also diversifying into health care, as it seeks to broaden its revenue stream away from the Aussie mobile market.
Similarly, wealth manager and diversified financial company AMP Limited (ASX: AMP) is expected to report a rise in its bottom line of a third in the current year, followed by a further increase of 7.5% next year. Part of the reason for this is impressive performance regarding its assets under management which, as the company reported in its most recent update, increased by 6% versus the comparable period last year.
This potential for income growth, plus the efficiency savings which AMP is on-track to make in areas such as IT and other administrative spaces, are taking place at the same time as AMP shifts its focus towards Asia. And, encouragingly for the company's investors, it continues to make strong progress despite a volatile recent period regarding claims, as well as the uncertain outlook for the ASX.
With their upbeat growth potential and sound strategies, Telstra and AMP appear to be worth a premium versus the ASX. However, they all have the same price to earnings (P/E) ratio of 15.9 and, as such, upward rerating potential is high for the two stocks, which makes now a sound opportunity to buy a slice of both of them.
