When seeking out companies that are worth investing in, many of us use various valuation multiples to help with our decision. One of which is, of course, the widely used price to earnings ratio, with a lower ratio potentially highlighting a good value investment opportunity.
However, delving deeper can throw up a few surprises. For instance, a low P/E ratio can be a result of a bleak outlook or other problems with the company in question. Similarly, a high P/E ratio can be due to impressive future prospects and potential.
With that in mind, here are three stocks that may seem rather expensive at first glance, but which could beat the ASX moving forward.
Transurban Group
With a P/E ratio of 40.6, it's understandable why many investors would avoid investing in Transurban Group (ASX: TCL). After all, it's over 2.5 times the ASX's P/E ratio of 15.8.
However, Transurban has excellent future prospects that make such a high P/E ratio seem pretty good value. For instance, it is forecast to increase its bottom line at an annualised rate of 26.9% over the next two years, which means that net profit could be as much as 61% higher in FY 2016 than it was in FY 2014. Indeed, when combined with its P/E ratio, a price to earnings growth (PEG) ratio of 1.51 looks highly appealing.
Furthermore, with shares in the toll road and tunnel operator currently yielding a partially franked dividend of 4.5%, Transurban offers excellent income prospects as well as huge growth potential.
Woolworths Limited
Like Transurban, Woolworths Limited (ASX: WOW) has a higher P/E ratio than the ASX, with it being 17.2 versus 15.8 for the wider index. However, its rating was higher until the company released weaker-than-expected sales numbers, which caused shares in Woolworths to decline by 7% in the last couple of days.
Despite this, Woolworths still has considerable appeal. That's because it has huge defensive qualities, with a beta of just 0.66, and pays a fully franked yield of 4.1%. Although the ASX has made gains in recent weeks and sentiment is more buoyant than a couple of months ago, relatively reliable, defensive plays like Woolworths should still appeal to investors moving forward.
With a superb track record of earnings and dividend growth (they have increased at annualised rates of 11.2% and 11.6% respectively over the last ten years), Woolworths' current valuation appears to be highly appealing.
Scentre Group
Despite rising by 16% since listing in June of this year, shares in Scentre Group Ltd (ASX: SCG) trade at only a small premium to the ASX. Indeed, their current P/E ratio of 16.9 looks decidedly attractive on a relative basis – especially since shares in Scentre offer a fat dividend yield of 5.6%.
Although it's unfranked, the appealing dividend prospects for Scentre could prove to be a major attraction for investors moving forward. Furthermore, as the company reported in its most recent half-year results, its portfolio remains more than 99.5% leased and the $2 billion in current development projects in which it is involved are progressing in-line with expectations.
With earnings due to rise roughly in-line with the wider market at 5.1% per annum over the next two years, Scentre could prove to be a highly profitable investment in 2015 and beyond.
