At the present time, few investors may be feeling bullish. After all, the Aussie economy could be entering a prolonged recession, Chinese economic growth is slowing down and the prospects for the ASX seem to be somewhat downbeat. And, with the index having fallen by 5% since the start of 2014 and being at the same level as it was all the way back in August 2013, investing in shares may not seem to be a great idea.
However, now could be the perfect time to buy high-quality stocks. That's because they offer much better value than a few months ago and, while the near term may include some lumps and bumps as the economy experiences a challenging period, now seems to be a sound moment to buy shares for the long term.
One company which has endured a tough period is iron ore miner, Rio Tinto Limited (ASX: RIO). Its profitability has fallen dramatically as the price of iron ore has hit a ten year low and, looking ahead, it would be of little surprise for its price to keep moving south.
Of course, as a mining company, there is little Rio Tinto can do about the price of iron ore: it is one of the risks associated with operating within an industry where the good is homogenous. However, Rio Tinto is doing all it can to improve efficiencies, rein in on spending and strengthen its position relative to its sector peers. As such, it seems to be in great shape for the long run, which should give its investors' confidence regarding its future prospects. And, with its shares trading on a forward price to earnings (P/E) ratio of 14.9 and having a yield of 5.7%, their uprating and income potential seem strong.
Similarly, Cochlear Limited (ASX: COH) has endured a tough period, with its sales and profitability coming under pressure in recent years. However, the medical device company's financial performance is set to be stimulated by a handful of new products which are due to contribute to an increase in its earnings of around 16% per annum during the next two years.
Of course, the market seems to be pricing in improved performance by Cochlear, since its shares have risen by 22% in the last year. However, given its excellent track record of growth (cash flow has risen by 15% per annum during the last decade, for example), a price to earnings growth (PEG) ratio of 1.89 indicates that there is further to go for the company's share price over the medium to long term.
Meanwhile, specialist lender, FlexiGroup Limited (ASX: FXL), has, unlike Rio Tinto and Cochlear, enjoyed improving trading conditions in recent years. The fall in interest rates has caused demand for new loans to rise, which has been a major contributor to the company's rise in earnings of 5.7% in the last year.
While the outlook for Aussie consumer confidence is somewhat downbeat, FlexiGroup is expected to post positive earnings growth in each of the next two years. More importantly, its margin of safety is rather wide, with it trading on a forward P/E ratio of just 7.9. So, if consumer confidence does deteriorate and the economy moves into a recession, there appears to be sufficient value in FlexiGroup's share price to prevent a sharp fall. Similarly, if the economic outlook improves, there could be a major rerating ahead for FlexiGroup's shares.
