Should you buy these 5 stocks?

What do Crown Resorts Ltd (ASX:CWN), REA Group Limited (ASX:REA), Insurance Australia Group Ltd (ASX:IAG), Challenger Ltd (ASX:CGF) and G8 Education Ltd (ASX:GEM) have in common?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You are probably thinking the below stocks have been excellent market performers over a long period of time. You would be right! According to Morningstar, each stock has achieved an average annual rate of return of at least 15% over the past five years. What you might not know is that all five companies have underperformed the market considerably since the beginning of 2015.

Crown Resorts Limited (ASX: CWN) has fallen over 20% from its yearly highs after weak consumer sentiment and a Chinese government-led crackdown on gambling on the island of Macau. The company has a strong pipeline of projects on its books including the much anticipated Crown Sydney and is also tendering for new projects including the Queen's Wharf development in Brisbane. Crown is also diversifying its operations through online wagering and gambling. The company is operating in a growing market for gambling and the current share price offers risk tolerant investors a good entry point.

REA Group Limited (ASX: REA) shareholders have seen the share price fall by around 25% since its third quarter results were released in May. Although it reported a 30% increase in EBITDA, the market was unimpressed by a 7.2% decline in nationwide listing volumes. The market may also fear the resurgence of its main competitor Domain. REA Group has always dominated the online property listing space in Australia and is now expanding its business to overseas markets. I believe the market has overreacted and offers investors a rare opportunity to purchase REA Group with a price-to-earnings ratio of less than 27.

Insurance Australia Group Ltd (ASX: IAG) lowered its full year guidance in April based on increased provisions for Cyclone Maria and the severe weather recently experienced in New South Wales. The share price has fallen around 18% since the start of the year and underperformed the general market. The company is attractively priced and offers a dividend yield around 6% but I would be inclined to wait until the price falls further. The insurance business is inherently risky and volatile, making it difficult to forecast earnings.

Challenger Ltd (ASX: CGF) is trading at the same price as it was at the start of 2015. The company controls about 80% of the retail annuity market that provides Australian retirees safe and reliable incomes for their retirement. This sector of the financial industry is expected to grow strongly with Australia's ageing population and Challenger is in a prime position to take advantage of it. The company is valued at 11x FY15 earnings and provides a dividend yield over 4%. This could be a good entry point for long-term investors.

G8 Education Ltd (ASX: GEM) shareholders have had a volatile 2015 so far. The share price dropped 33% from its 2015 high before recovering and then falling again to its current price around $3.70. The market has been concerned about its "roll up" strategy that has provided the company with so much earnings growth in the past. A temporary boost was provided by the recent budget measures aimed at making childcare more affordable but the share price has slowly retreated to pre-announcement levels. G8 Education controls around 4% of a childcare market that is projected to grow each year. With a growing dividend and strong management team, investors should think seriously about G8 Education as a long-term investment.

Foolish takeaway

While buying under-performing stocks is a risky strategy, it often provides investors with exciting opportunities to own companies at a discount that may be great long-term performers. Investors should be positive about the long-term fundamentals of the company but also be comfortable with short-term volatility.

Motley Fool contributor Christopher Georges owns shares in REA Group Limited and G8 Education Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »