Is Wesfarmers Ltd ready to go to the next level up?

Whenever a stock is at or within striking distance of a new high, there is always the question of whether it will hit it and slide back down or have enough business momentum for the market to push it up to the next level.

That’s why it is usually wise not to chase stocks up. Let them hit the high and watch how they react. Even a pullback of 5% – 10% from a high could be healthy for the stock and shake out sellers. If there is enough true buying, soon enough it will head for the next leg up.

One big company that is in this situation currently and may be moving up soon is Wesfarmers Ltd (ASX: WES).

The $49 billion retailing conglomerate, which owns such companies as Coles supermarkets, Bunnings Warehouse, Target and K-Mart, has grown both revenue and earnings in a consistent upward trend over the past 10 years. Right now it is just shy of its $44.30 high that it set back in early January.

Target has been especially weak recently. Though its perennial breadwinner Bunnings Warehouse is still growing strong. Also what may help Wesfarmers right now is the recent sale of its insurance underwriting business to Insurance Australia Group Limited (ASX: IAG). This will bring in extra cash for a potential multi-billion dollar acquisitions war chest.

It is also planning to move into financial services like personal loans and may also be considering applying for a banking licence for a further expansion into banking services like residential mortgages. This could be how such an already big business becomes even bigger.

Currently, the stock offers a 4.2% dividend yield and is priced at $42.93, or 21.7 times earnings. This is pretty much at the top of its historical price/earnings (PE) average range. Rival Woolworths Limited (ASX: WOW) is at around 19 times earnings, so Wesfarmers is at a slight premium.

An alternative stock that could beat them all

Wesfarmers is a long-term growth prospect which could be a steady dividend payer for many years to come. It probably will set a new high soon, but I am not incredibly bullish on it because of the slower growth rate that most giant blue-chips have.

Alternatively, The Motley Fool's top advisors have uncovered a small-cap stock with fantastic growth potential which is well worth checking out.

In addition to fantastic growth potential, it offers a 7% grossed-up dividend yield! Our top analyst recently dubbed it, "The Motley Fool's Top Dividend Stock For 2014 - 2015". Best of all: You can get the name and code of this ultra-promising stock forFREE! Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

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

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