The forthcoming of change of government in the United States and what it means for the global macro-economic environment has got investors reassessing what may be the next big share market winners.
The key change for investors since Donald Trump's U.S. election victory has been the sharp rise in the yield on U.S. government 10-year bonds. This yield is generally considered to be the benchmark risk-free rate of return available to investors over the medium term.
This is important to equity investors as shares must offer returns a fixed amount above the risk free rate in order to compensate investors for the inherent risks in share market investing. As the risk free rate has lifted the valuations of growth stocks have fallen as they are valued according to their longer-term (but unknown) earnings growth potential.
As an example this week the US FANG tech stocks like Facebook, Amazon and Netflix have been hammered as investors re-rate their present values relative to the certainty around their future cash flows and risk free returns available across other asset classes.
While in Australia the bond proxies like Transurban Group (ASX: TCL) and Sydney Airport Holdings Ltd (ASX: SYD) have tumbled as their income returns are no longer considered so valuable given the risks involved in owning businesses such as airports, which are vulnerable to a downturn due to an act of terror for example, among other risks.
So if neither growth or income stocks are any good going forward, where's an investor to look for the best returns in 2017?
The answer is to find those that offer good valuations, with modest growth potential and dividend returns.
Below I have five that I think fit the bill.
Lifehealthcare Group Ltd (ASX: LHC) is a junior healthcare provider that trades on just 10x analysts' estimates for earnings per share in financial year 2017, with a bumper 5.3% trailing dividend yield. Now that the regulatory concerns around this business appear to have lifted the shares look cheap at $2.36 given its decent outlook.
Event Hospitality and Entertainment Ltd (ASX: EVT) is an often overlooked business that offers a good mix of value and yield on around 16x estimated earnings with a 3.7% trailing yield. Moreover, as a hotelier (think QT Hotels) and leisure business it offers excellent leverage to the expected medium-term boom in inbound tourism.
JB Hi-Fi Limited (ASX: JBH) still trades on an undemanding 16x estimated forward earnings with the shares offering a fully franked trailing dividend yield in the region of 3.6%. The stock has been sold off recently as investors are nervous over news headlines around potential competition from the likes of Amazon. However, for now it looks set to retain a totally dominant position in bricks-and-mortar electronics retail. As such, shares look good value in my opinion.
Amcor Limited (ASX: AMC) is the global packaging business that offers a decent valuation and dividend yield in the region of 3.8%. It also offers exposure to a stronger US dollar thanks to its substantial operations in the region, although it is also now moving into China and Asia more broadly as its global empire expands. Selling for $14.12 the stock is likely to offer decent total returns for investors with a long-term time horizon.
Vocus Communications Limited (ASX: VOC) is the broadband, data centre, and fibre optic internet business that lost around 30% of its value last week after providing a market update. Its growing pains now look more than baked into the stock price and if you assume it can deliver 34 cents per share in earnings in FY17 it trades on just 12.5x forward earnings with a yield likely to offer more than 4% fully franked. At $4.20 this stock looks undervalued to me.
