Value and growth go hand-in-hand in investment. Some stock could be cheap on several metrics like price to book value or PE ratio, but if the element of growth in business, revenue and earnings isn't strong, then that "cheap" stock could stay cheap for a long time.
Balancing that out creates the bargain, based on the price you pay now and the value from growth you get later on down the line.
Macquarie Group Ltd (ASX: MQG), the investment bank, has made a good run from about $35 a share to $55.82 over the past year, but there still could be ample growth ahead with a rising housing market and improving stock markets both domestically and internationally.
The 22.6 PE is higher than its historical average, but earnings growth went from a downward trend to an upward one over the past several years. It has a 3.8% dividend yield, yet potential earnings per share growth could sweeten up the share price and justify the above average PE.
Suncorp Group Ltd (ASX: SUN), the fifth largest domestic bank and well-known insurer, upped its interim dividend by 40% to 35 cents per share and the dividend yield is sitting at 4.52%. Net profit was down over the half year by 4.5%, but the company is going through a cost management program to simplify the business.
The main cause of lower earnings was higher than natural budgeted perils, yet its underlying trading ratio, which measures an insurer's profitability, was actually up to 14% from 13.4%. With less natural disasters recently and a more streamlined business, the savings will fall to the bottom line, potentially improving earnings per share.
Foolish takeaway
Even when a company has generally rising earnings, sometimes one lower than usual half year or full year can throw things off track. That is how long-term investors catch bargains when the market is not completely sure how to price stocks. The mispricing creates the bargains, yet it still takes several years to achieve the full benefit.
