With the ASX having fallen by 11% in the last six months, a number of high-quality stocks are now trading at even more appealing valuations than they were in May.
Certainly, the outlook for the Australian and for the global economy is more challenging than it was back then, with the Chinese economy, in particular, showing increasing signs of a slowdown. And, while things could get worse before they get better, now presents an opportunity for long-term investors to take advantage of favourable pricing conditions.
One stock which has fallen heavily in the last six months is National Australia Bank Ltd. (ASX: NAB). Its shares are down 19% during the period and now trade on a price to earnings (P/E) ratio of only 13.3, which is lower than the ASX's P/E ratio of 15.8 and indicates that there could be upward rerating potential on the cards.
A potential catalyst to effect this is increasing market sentiment resulting from NAB's improving financial position. In fact, NAB is now among the top 25% of its banking peers when it comes to the common equity tier 1 ratio, which indicates that it is relatively well-positioned to withstand any further challenges regarding the economic outlook. This has been achieved through a mix of rights issues, retaining capital and also the sale of non-core assets. The latter has also helped to improve the bank's long-term earnings growth outlook since its UK operations, in particular, have proved to be disappointing on the risk/reward front.
Despite bolstering its cash resources, NAB still offers a very high yield of 6.6% (fully franked), which is 200 basis points higher than that of the ASX. Certainly, there has been a concern among investors that banks such as NAB will be unable to increase dividends at a brisk pace in future years owing to the increased regulatory demands on capital as well as the stalling Australian economy. However, with NAB's dividends being covered 1.3 times by profit and the bank's bottom line forecast to rise by 7.9% per annum during the next two years, it seems to be well-positioned to raise dividends at a relatively pleasing rate.
Meanwhile, shares in Ramsay Health Care Limited (ASX: RHC) have declined by 2% in the last six months, which is a strong performance on a relative basis. Although the company's valuation has not become vastly more appealing, Ramsay still trades on a price to earnings growth (PEG) ratio of only 1.48, which is only slightly higher than the ASX's PEG ratio of 1.36.
Unlike the ASX, though, Ramsay offers a high degree of stability, with it benefitting from a large economic moat within the markets in which it operates. For example, new entrants are fairly thin on the ground, while Ramsay's size and scale provide it with cost advantages and economies of scale. Furthermore, Ramsay is likely to benefit from favourable demographics as the world population continues to age, with its relatively new exposure to China offering long-term growth potential as the country's population becomes wealthier and older in future years.
In addition, with Ramsay having increased its bottom line at an annualised rate of 16.9% during the last decade, it offers a high degree of stability. With the future for the ASX being highly uncertain, this could prove to be a highly appealing asset to own for the long term.
