Get set for a winning 2015 with these 3 stocks

All things being equal, a higher forward price-to-earnings (PE) ratio should correspond to a company with a higher expected earnings growth rate.

Take for example the following two well-known stocks. Metcash Limited (ASX: MTS) which is a wholesaler to and owner of the independent supermarket brand IGA is trading on a FY 2015 PE of just 8.8x, however this seemingly low multiple is a reflection that analysts believe Metcash’s earnings will fall by around 25%.

Meanwhile, leading blue-chip stock Brambles Limited (ASX: BXB) is trading on an FY 2015 PE of 22x, which reflects analysts’ expectations that the global provider of pallets and container pooling solutions will grow earnings at over 13%.

Important rule of thumb

Some investors are naturally drawn to the idea of a bargain which leads them toward stocks selling on low PEs. It must be remembered however that a PE in isolation without considering growth is of little help in determining value.

As a rule of thumb, if one wants to be conservative it arguably makes sense to not pay a PE multiple higher than the expected growth rate in earnings per share (EPS). In other words, for a company expected to grow earnings next year at 10%, you would limit yourself to only acquiring the stock if it was available on a forward PE of 10x or less.

This is a good rule of thumb in theory but it can be hard to implement in practice. Here are three stocks with high PEs that could perform strongly in 2015 based on forecast EPS growth rates.

  • Altium (ASX: ALU) has a forecast PE of 23x yet is expected to grow EPS by approximately 20%.
  • SEEK Limited (ASX: SEK) is trading on a forecast PE of just under 28x but it is forecast to grow EPS at nearly 26%.
  • Veda Group Ltd (ASX: VED) is trading on a FY 2015 PE of 25x but with an EPS growth rate forecast of 31%.

It can certainly be worth paying up for growth but there are plenty of pitfalls involved! That's why its important to do plenty of due diligence and in-depth research before you commit to buying shares in any company. YOUR IN LUCK - that's all been taken care of for you with the following stock...The Motley Fool's top stock for 2015 is a sexy ASX tech company with a stunning track record and plenty of room to run. Discover our analysts' hands-down favourite bet for 2015 in this brand-new FREE report. Simply click here to grab your copy.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned. The Motley Fool owns shares in Altium. 

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