6 stocks smart investors are still buying

Investors have heard some bullish commentators toss around terms like “ASX 6000”, whilst others have become concerned that Australia’s biggest stocks are “too expensive” and it’s time to get out. It doesn’t matter if you side with the bulls or bears, but it does matter what price you pay for stocks.

Many of the top 20 stocks are overvalued because low interest rates have sparked a rush on high yields and the companies haven’t had the growth to sustain higher prices. Investors will soon be forced to transition their funds away from the ASX’s top blue chip stocks.

If the RBA leaves the cash rate on hold or lowers it, expect smaller stocks that are both highly leveraged for growth and pay good dividends to be on the receiving end of the stock market’s transition. Here are six smaller stocks I believe are potential beneficiaries.

1. Mortgage Choice (ASX: MOC): Mortgage Choice allows would-be homeowners and investors to compare and save on mortgages. I expect revenues to increase as a result of low interest rates and a revival of the property market. Coupled with a 4.7% dividend, it’s likely to perform well in coming months.

2. Metcash (ASX: MTS): Metcash is owner of IGA branded supermarkets. Yes, it is facing stiff competition from Woolworths and Coles, but it will respond to the pressure. It is likely IGA stores (accounting for around 60% of Metcash’s revenues) will start to carry higher margin products and use their own market power to drive down prices. With an 8% fully franked dividend and a recent drop in price, Metcash is a great income play.

3. Myer (ASX: MYR): Myer could easily be exchanged with David Jones (ASX: DJS) because they both have beaten-down stock prices yet offer great dividends and will benefit from increased consumer spending as a result of low interest rates. Stocks can only go one of two ways and these have both been on a downwards trend since 2009.

4. Telstra (ASX: TLS): Some say Telstra is historically expensive, but of all the top stocks on the ASX it has the brightest future and despite losing revenues on its high margin legacy businesses, its NAS and international divisions are exciting growth prospects.

5. Thorn Group (ASX: TGA): Thorn Group pays a great, fully franked dividend but is also an exciting growth prospect. The company is focused on becoming Australia’s biggest provider of rental and financial services to sub-prime consumer and commercial markets yet has a market capitalisation of only $342 million and carries very little debt.

6. Yellow Brick Road (ASX: YBR): In FY13, Yellow Brick Road almost doubled group revenues on the previous year. Although profits lagged thanks to marketing and acquisition expenses, it’s in an exciting growth phase and increased its Mortgage revenue over 115%, grew its wealth management revenue 217% and general insurance revenue 29%.

Foolish takeaway

Market fluctuations and cycles will come and go. We’re about to experience a shift away from high yielding blue chips to higher yielding small caps. It’s important to ignore the ‘noise’ that comes with financial markets and take advantage of unwarranted price drops.

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Motley Fool contributor Owen Raskiewicz owns shares in Metcash, Myer and Yellow Brick Road.

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