2 bargain stocks for frugal investors

Get discounts on the rising earnings they may bring.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I wanted to share with you two companies that are in bargain territory compared to the kind of growth they could achieve.

If you think their share prices have risen too much, you can always wait a little to see if you can buy on a pullback or minor correction. I am looking more at the business side. These two have bright earnings potential that makes current price levels comparatively cheap.

Investment bank Macquarie Group Ltd (ASX: MQG) stands at a PE of 16, which is at the top of its historical average PE range, yet the growth prospects over the near term are good and would suggest rising earnings.

Its share price has risen almost 20% in the past six months and has climbed past $50. It has a dividend yield of 4.17%. The company stated in its outlook update that it expects its full year 2014 result to be about 40%-45% higher on FY2013.

That may be priced into the current share price. However, the catalysts for this growth will still be in play for the near future. More earnings gains are possible, so what is currently a 16 PE may be a fair bit lower relatively as we go forward. That would be a bargain for possible future returns.

ResMed Inc. (ASX: RMD) has a PE of 18, which is a little less than its sector's 19.8 average PE. Net profit growth over the past five years has been strong with a compound annual growth rate of around 23%.

Analyst forecast growth is for about 15% over the next two years. Assuming it can achieve some level between those two figures, coupling that with a 2.30% dividend yield, the 18 PE may be less than the potential earnings growth and dividend combined. That puts it into potential bargain territory.

Compared with its historical PE averages, 18 is relatively low. It has been in the mid to high-20s a number of years in the past.

Foolish takeaway

Sometimes we can see the potential of companies to increase earnings and send share prices up, but because we can't exactly say when that will happen, we may be put off from buying. That's why you have to concentrate more on the business than the share price when assessing its potential.

If you have the conviction that a business will have greater earnings in the future than now, that is where you place your confidence.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »