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3 stocks to buy and 1 to avoid

The news yesterday that Warren Buffet’s Berkshire Hathaway is taking a $500m stake in IAG was greeted with much optimism until the lack of a forward guidance from the RBA’s June meeting minutes put a dampener on things. The investing legend is apparently keen on other Australian stocks as well such as our banks, which is potentially a sign that our market is looking cheap after the steep falls we’ve seen over the past month.

Here is a list of three stocks that I believe are good prospects and one to avoid.

Good prospects

Challenger Ltd (ASX: CGF)

The company has done tremendously well in reviving the annuity business in Australia and could be set to grow considerably. Tailwinds such as our regulator’s willingness to accelerate growth in annuity adoption and the gradual drawdown of superannuation assets by baby boomers will play a big part in Challenger‘s growth. The launch of Challenger’s annuities later this year on the investment platform of Colonial First State and VicSuper, some of the country’s largest fund managers, is a giant step towards realising its potential.

Ramsay Health Care Limited (ASX: RHC)

This private hospital operator could be set to continue growing well into the future. With an aging population a major challenge to be tackled by governments around the globe, especially in Australia, the need for healthcare will only increase over time. Domestically the overcrowded public health system and wealthy baby boomers becoming a larger portion of the elderly population should sustain growth in demand for private hospitals. Internationally the expansion into the Chinese market could be a significant driver of growth as well.

Dick Smith Electronics Ltd (ASX: DSH)

Although the May budget has revived the fortunes of retailers, Dick Smith has lagged compared to the rally of other electronics retailers such as JB Hi-Fi. Apart from the fact that Dick Smith might be slightly undervalued, it also offers a juicy 6.85% dividend yield which will provide a massive income boost in the current low rate environment. The company’s Move stores, which focuses on the fashtronics niche – selling fashion electronics to young women, has been tipped for great things with overseas expansion a long-term target.

Avoid

Genworth Mortgage Australia Ltd (ASX: GMA)

The main reason to be cautious on this stock is the uncertainty surrounding the viability of LMI in Australia. QBE has openly voiced concern over its LMI division, and has mulled over an IPO to rid itself of the business. With residential mortgages written predominantly by the big four banks there is a lot of key client risk to consider. The move by Westpac in February to terminate its agreement with Genworth has raised the spectre that other banks could follow suit.

Whilst Challenger, Ramsay and Dick Smith are good prospects, our analysts at the Motley Fool have just handpicked their top stock for 2015. It’ll be worth your while to check it out.

5 stocks under $5

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Motley Fool contributor Simon Chan has no position in any stocks mentioned. 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.

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