Knowing what stocks to buy can be difficult at the best of times, let alone when the share market is trading at a multi-year high.
Despite a disastrous session on Friday last week, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) Index is still sitting well above the 5,500 level and, according to some analysts, could be headed for 6,000. That's an 8% upside from today's mark.
Put simply, you don't want to miss these gains. Especially with interest rates set to stay at (or below) 2.5%. But with so many stocks now considered to be heavily overpriced, which companies should you be targeting?
Commonwealth Bank of Australia (ASX: CBA)
It seems that investors think that, despite its lofty valuation, Australia's largest bank is still a solid prospect for new money. On heavy volumes, the shares last week smashed through their previous peak to record a fresh all-time high at $83.92.
Indeed, if the share market is to climb higher, it is likely that Commonwealth Bank will also continue to perform, given its heavy weighting to the index. One broker even thinks they will reach as high as $87.80 – so really who's stopping them from reaching $90?
The problem is, I believe their strong momentum is limited to the short term. Already, Commonwealth Bank is (by almost every measure) the world's most expensive bank, trading on a P/E ratio of 15.5 and a Price-Book ratio of 2.96. While it still offers a solid dividend yield, the bank's ability to generate long-term market-beating returns is looking less and less likely as the days go on.
Coca-Cola Amatil Ltd (ASX: CCL)
Unlike Commonwealth Bank, the beverage manufacturer has made very few friends over the last year or so. With a pricing war with Schweppes, pressures from the major supermarket chains, a strong Aussie dollar and a struggling SPC Ardmona business all combining to severely impact profits, the stock has dropped an astonishing 40.1% since its March 2013 peak.
While investors are justifiably nervous regarding the company's short-term outlook, Coca-Cola Amatil remains a solid long-term bet. With a stable of some of the world's most popular brands behind it, management is also focusing on ways to improve productivity and reduce costs which should guide it back to strength in the coming years. At $9.25, I am strongly considering increasing my current stake.
BHP Billiton Limited (ASX: BHP)
BHP Billiton is not only the world's largest diversified miner, but also one of the lowest-cost producers thanks to its sheer size and enormous production rates which give it an incredible competitive advantage moving forward.
As iron ore and coal continue to experience pricing pressures, high-cost producers are being forced out of the market, leaving more market share for miners like BHP. While the miner continues to focus on improving productivity and costs, BHP could be a solid bet for investors over the coming years – particularly with its 3.3% fully franked dividend yield.
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While Coca-Cola Amatil and BHP Billiton could deliver investors strong returns over the coming years, investors should also consider other high-yielding alternatives. While interest rates are set to remain low for some time yet, dividends are one of the best ways investors can optimise their profits.
