The Motley Fool

Super Retail and Flight Centre: 2 stocks to buy now

Times are tough for stock pickers. It’s getting harder and harder to find cheap or undervalued stocks, especially larger caps, as the S&P/ASX 200 (ASX: XJO) hits five-year highs and the market price-to-earnings (PE) ratio sits just above the long term average. Long-term investors need to focus on stocks with solid growth prospects that are likely to increase their dividend yields, margin, or earnings in coming years.

Two such companies are Super Retail Group (ASX: SUL) and Flight Centre (ASX: FLT). Operating in the consumer retail and consumer travel industries respectively, they are both leveraged to the ongoing recovery in consumer confidence and spending as a result of the change in government, rising housing market, and the (hopefully) improving economy as a whole.

Super Retail Group owns a stable of brands specialising in automotive parts and recreational activities, including boating, camping, fishing and sports. Investors have been rewarded this year, with Super Retail’s share price increasing by around 30%, as most retailers have risen strongly from 2012 lows.

Like its competitors, Super Retail stands to be a major beneficiary of a rise in retail sales as consumer sentiment improves, however the recreational goods sector it operates in may be a key differentiating factor. This was seen last month with August retail sales improving 0.4% month on month and 2.3% from the previous corresponding period (pcp), but within these numbers, recreational goods surged, up 4.6% month on month and 8.2% on the pcp.

Consensus estimates for the company’s 2014 earnings point to a slowdown in growth as competition from other retailers increases and the cost base (wages, rent, etc.) slowly edges up, however Super Retail could well outperform if the retail numbers continue to trend upwards.  The share price has pulled back a little from this year’s high and may present a buying opportunity for long-term investors.

Flight Centre has also had an exceptional year. The share price has risen nearly 80% following strong profit results over the past two years. Flight Centre sells airfares and holidays in Australia, the UK and the US, from around 2,500 physical stores and online.

The company has managed to grow earnings consistently since 2005, with the notable exception of 2009 during the GFC when it was forced to write down a poorly timed US acquisition. Since then, the company has gone from strength to strength and is successfully expanding beyond Australia. International revenue has grown to 22% of earnings, and margins, revenue, profit and cash are all increasing strongly as the US, UK and Australian markets continue to recover. Management has predicted 8-12% growth in profit before tax for this financial year and has a history of underpromising but overdelivering.

Foolish takeaway

Investors are finding it increasingly difficult to pick winning stocks, as many of the best ones have risen so strongly it’s difficult to believe it can be sustained. While all Foolish investors will know that past performance is no guarantee of future success, these two companies may still provide some upside for long-term investors Any 5-10% pullback in the market will represent a good buying opportunity.

Not many would consider Super Retail or Flight Centre as income stocks. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading

Motley Fool writer Andrew Mudie does not own shares in any of the companies mentioned.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.