It's been a stunning year so far for investors in Vocation Ltd (ASX: VET) and Western Areas Ltd (ASX: WSA), with shares in the two companies rising by 61% and 123% respectively. Both of these performances are well ahead of the ASX's 4% rise year to date. However, could there be more to come from both stocks? Or, after such strong gains, is it worth taking a profit?
Similarities
Although the two companies operate in very different sectors (Vocation is a training provider, while Western Areas is a nickel miner) they have a couple of similarities. For starters, they both appear to be massively overpriced at first glance. For instance, Vocation trades on a price earnings (P/E) ratio of 46.3 and Western Areas has a much lower P/E ratio of 24.1. While the ASX has a P/E ratio of 15.8, therefore both stocks appear to be ripe for a fall.
Furthermore, neither stock appears to be attractive to income-seeking investors. That's because they both yield just 1% (fully franked) right now, which seems rather low when the ASX's yield is 4.4% and Aussie interest rates are 2.5%.
Positive Surprises
As such, it appears that value and income investors should avoid Vocation and Western Areas. However, delving a little deeper paints an entirely different picture. That's because both companies are set to deliver extremely strong earnings growth over the next couple of years, with Vocation due to grow its bottom line at an annualised rate of 83.8% over the next two years. This is a superb rate of growth, but is slightly bettered by Western Areas, which is expected to post annualised earnings growth of 83.9% over the same time period.
Suddenly, the ultra-high P/E ratios don't look so excessive. For example, when they are combined to generate the price to earnings growth (PEG) ratio, Vocation has a PEG of just 0.55, while Western Areas is even lower at 0.29. Both numbers highlight growth at a very reasonable price and indicate considerably more upside potential is on offer.
Income prospects
Meanwhile, strong earnings growth allows both companies to increase dividends per share at an astonishing rate. For example, Vocation is set to grow dividends per share by 127.1% per annum over the next two years, while for Western Areas the growth rate is expected to be 116% per year over the same time period. This means that in 2016 the two companies could be yielding as much as 4.9% (Vocation) and 4.6% (Western Areas) – assuming constant share prices.
Looking ahead
As a result of stunning growth potential, attractive valuations (when that potential is factored in) and impressive income potential, Vocation and Western Areas both appear to be worth buying.
