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