I don’t like to say it but the Australian stockmarket is not cheap.
With the S&P/ASX200 Index (INDEXASX:XJO) up 34% since the beginning of 2012, our top 200 stocks are, on average, over a third higher than what they were just a few short years ago.
However, whist some of those blue chips deserve to be trading at higher levels, I know not all of them do. So investors need to be more cautious than ever that they don’t overpay.
Another way to look at it is, it’s getting harder to find quality businesses trading cheap.
However, outside the top 200 stocks, there’s still a number of quality, dividend-paying businesses trading on relatively attractive valuations. Here are three to consider:
1. Collins Foods Ltd (ASX: CKF) is an owner and operator of KFC, Sizzler and Snag Stand food outlets throughout Australia and Asia. Whilst the Sizzler business is currently under pressure to transform its domestic operations, it continues to rollout across Asia with modest success. The KFC business is however growing strongly, both organically and acquisitively. Since making it my top stock pick for February Collins Foods has climbed 22% in price. However I still see long-term upside in the stock price from here. It is forecast to pay a 4.6% fully franked dividend.
2. FSA Group Ltd (ASX: FSA) provides services to financially distressed individuals and businesses. Whilst FSA’s business could be expected to suffer in times of low interest rates because, presumably, less people would default on their loan repayments, FSA’s management recently announced it expected to report profit before tax of between 18% and 25% higher than in FY13. I think this is very good considering they increased earnings 26% year over year, in 2013.
If margins can be upheld in the upcoming year, which I think they will, the current price will appear cheap. What’s more, with over 50% of the debt arrangement market t operates in, once interest rates start rising, we’ll likely witness growth from the group’s debt services division. It is expected to pay a 3.8% fully franked dividend.
3. Hills Ltd (ASX: HIL) was once the maker of the world-renowned Hills Hoist clothes line. Now, Hills has transformed away from its steel businesses into technology and communications. A field which is already delivering promising results for the company. Based on consensus earnings estimates for FY15 it appears to be trading on a price-earnings ratio of 13 and dividend yield of 4% fully franked. Whilst a transition as big as this is never easy, Hills is making inroads to becoming a much more profitable organisation. In addition it’s got enough money on hand to make acquisitions in coming years.
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Each of these companies offer long-term growth at a discounted rate to the broader market. Of the three, Hills is my choice and has capable management in place to transform the business.