One of the simplest ways to earn a top notch total return is to invest in high quality stocks at reasonable prices. While this sounds simple in theory, executing it can be tough due to the emotions of fear and greed which often consume investors.
At the present time, many investors are fearful of the ASX's future, with a weak economic outlook and the potential for a high degree of volatility in the short term hurting investor sentiment. However, such a situation presents an opportunity to buy businesses which may now be trading at even more appealing prices as a result of the ASX's fall of 11% in the last six months.
For example, QBE Insurance Group Ltd (ASX: QBE) has posted a share price fall of 8% in the last three months even though its long-term prospects remain bright. The key reason for this is a disappointing third quarter trading update which showed that the company's gross written premiums remain under pressure, as well as challenging trading conditions being present in its Lenders mortgage insurance and North American divisions.
Certainly, QBE has endured a challenging era in recent years which included a loss-making period. But, with a new strategy which is focused on generating efficiencies, concentrating upon core assets and also a pivot towards the fast-growing Asian market, QBE is forecast to increase its earnings by over 25% per annum during the next two years.
This puts QBE on a forward price to earnings (P/E) ratio of just 12.3, which is lower than the ASX's P/E ratio of 15.2 and indicates upward rerating potential. Furthermore, QBE has a forward dividend yield of 5.4% which is 70 basis points higher than that of the ASX.
Of course, QBE's recent quarter was disappointing and the company's turnaround plan may now be executed at a slower pace than was previously envisaged. But, with the company due to have delivered major cost savings by the end of the year as well as selling off assets such as its US and Australian agency businesses, it appears to be on the right track to post share price rises over the long term. That's especially the case as it begins to tap into the Asian infrastructure investment space which is due to be worth $8tn between 2010 and 2020.
Meanwhile, health care company CSL Limited (ASX: CSL) has bucked the trend and risen in the last six months, with its shares being 7% higher than they were in May. A key reason for this is the appeal of its earnings profile, with it being focused outside of Australia and therefore likely to benefit from a weakening of the Aussie dollar. Furthermore, CSL has a more robust bottom line than many of its peers, as evidenced by its annualised growth rate in net profit of 21.8% during the last ten years. With fear and volatility being high among the investment community, more reliable stocks such as CSL could gain further upward momentum.
Clearly, CSL's P/E ratio of 25.2 is relatively high but, when the company's growth rate is taken into account, the resulting price to earnings growth (PEG) ratio of 2.1 has considerable appeal when the consistency of the business is factored in. And, with CSL yet to fully benefit from the integration of the influenza vaccine business which was recently acquired from Novartis, now could be an opportune moment to buy a slice of the company for the long term.
