The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) recently achieved a fresh multi-year high and, given that a number of Australia's largest stocks have helped drive it there, many have become wildly overpriced.
However, a number of financial firms have forecast it to climb even higher – possibly as high as 6,000 points! To do that, companies like Telstra Corporation Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) will need to continue performing strongly, while BHP Billiton Limited (ASX: BHP) will also need to get going. Do each of these companies have what it takes?
Here's what you need to know about Australia's most popular stocks…
Telstra Corporation
Telstra is Australia's largest and most dominant player in the telecommunications industry. The shares traded at around the $2.60 mark in early 2011 but have since risen to $5.44. That's just below a 10-year peak.
Despite the strong ascent in price in recent years Telstra still presents as an attractive prospect for investors wanting to build a strong foundation for their portfolio. The company should continue to grow steadily in Australia as well as overseas (it has indicated it wants to generate one third of revenue from Asia by 2020), while it also offers a juicy 5.3% fully franked dividend yield.
BHP Billiton
BHP's performance has been quite the opposite to Telstra's in recent years. The mining sector as a whole has acted as a drag on the market's overall performance as demand for commodities like coal and iron ore has weakened in China, causing them to fall considerably in price.
While that is enough to cause many investors to avoid the sector completely, BHP is actually looking like quite an appealing investment right now. The company boasts a high level of diversification, which means the risks are spread, while it is also one of the lowest cost producers out there thanks to its enormous production rates. Priced at $38.45, it is trading on a projected P/E multiple of 13.7 and offers a fully franked 3.3% dividend yield.
Commonwealth Bank
Commonwealth Bank is a different story to both Telstra and BHP. Many investors argue that the stock has been responsible for enormous gains in recent years, and that it will also continue doing so well into the future.
While I couldn't agree more that CBA is a quality corporation and that the returns in recent years have been nothing short of outstanding, I certainly don't agree that they will yield excellent returns from this point onwards. To put it simply, the stock is now wildly overpriced, and it is important to remember that not all great companies make for great investments.
Trading on a forward P/E ratio of 15.2 and a Price-Book ratio of 2.9, it appears investors believe it can continue growing earnings at a strong rate. Unfortunately, when interest rates rise, so will bad debt charges and earnings growth could prove very difficult to come by. While the stock may climb in the near future, it certainly doesn't look like a good bet for the long-term focused investors.
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