As investors, we're always seeking out stocks that can perform better than the ASX. After all, we want the best stocks offering the highest returns and, while in the long run the wider index should offer excellent total returns, if better performance is on offer then it would, of course, be preferable.
However, finding stocks that can considerably outperform the wider index can be tough. Do you seek out the companies offering the best growth rates? Or, focus on the cheapest stocks that could be the subject of a significant rerating? Moreover, are income shares the most likely to beat the wider index – especially with interest rates on the slide?
Clearly, there are opportunities to beat the ASX in all of these spaces. However, finding stocks that offer strong growth prospects at a reasonable price appears to be a sound move, with the likes of pharmaceutical company, CSL Limited (ASX: CSL), and investment company, Macquarie Group Ltd (ASX: MQG), scoring well on both these areas and having beaten the ASX by 38% and 35% respectively during the last 12 months.
Looking ahead, further outperformance seems to be on the cards, with CSL's historic earnings growth rate of 21.4% per annum during the last 10 years set to continue over the next couple of years. In fact, it is expected to deliver a bottom line that is 45% higher in financial year 2016 than it was in 2014, which could stimulate investor sentiment moving forward. And, with CSL trading on a price to earnings growth (PEG) ratio of just 1.22, it seems to offer excellent value for money, too.
Furthermore, CSL could benefit from a weakening Aussie dollar over the medium term. That's because most of its sales are derived from outside the domestic market and, with interest rates set to fall below 2% in 2015 and beyond, its growth rate could surpass that of the last decade.
Meanwhile, investment company, Macquarie Group, gained a boost last week with a trading update that was warmly received by the market. That's because the company stated at its AGM that its business is performing well and that it should not have any major issues in adhering to the new higher reserve requirement that was recently announced by regulators. This had hurt sentiment in major banks but, with Macquarie apparently having it under control, sentiment in the company could pick up over the coming months.
Furthermore, Macquarie is forecast to increase its earnings at an annualised rate of 8.8% during the next two years. This, alongside a price to earnings (P/E) ratio of 16.4, equates to a PEG ratio of 1.86. This may not be particularly low but, with Macquarie having a strong track record in recent years (net profit has risen by 9.2% per annum during the last five years), it appears to be trading at a fair price. And, while it and CSL have both soared in the last year, more share price growth appears to be on the cards in the medium to long run.
