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3 stocks set for higher profits in 2016

rollercoaster

It is an investing maxim followed by many that profits follow strategy. The theory behind this makes sense when you consider that reporting season earnings updates are “snapshots” of a point in time. The actual business decisions that result in those numbers that are reported on and analysed have been made months or even years earlier.

That’s why looking at company announcements for decisions and strategies that will influence future returns is just as important as being able to read a balance sheet or analyse a cash flow statement.

These three stocks have already made the tough decisions that will drive earnings higher in the coming years, and even better, there is already evidence that these strategies are delivering results.

Smarter insurance

QBE Insurance Group (ASX: QBE) has had a torrid past few years, with what can be described as acquisition indigestion affecting returns on many of its overseas operations. When combined with once in a generation disaster events that lowered profitability, QBE was forced to issue several writedowns and impairments, and has more recently found itself subject to a shareholder class action.

However, management has begun the process of rationalising the company and minimising the impact of underperforming divisions. Importantly, cash profits rose at the most recent earnings report, which is a good lead indicator for the future. The decision to focus on profitability and cash generation rather than fixate on revenue growth, even when it is less profitable, should reap better results going forward.

Benefitting from aging Australia

Challenger Limited (ASX: CGF) is one of the stocks best placed to capitalise on the growing demographic avalanche that will see millions of baby boomers exit the workforce. These retirees will seek a balance of financial products to fund their lifestyles, and the defensive, secure characteristics of the annuities offered by Challenger have already experienced strong market acceptance in a niche that is not contested by other major financial institutions.

Rising interest rates offshore and smart capital allocation will see Challenger report cash earnings approximately 10% higher than this year in 2016, though the company may well surprise on the upside as the industry-wide tailwinds kick in.

Riding the US recovery

Ardent Leisure Group (ASX: AAD) is a collection of entertainment and leisure businesses under one corporate banner. Its Australian operations include the Dreamworld theme park on the Gold Coast as well as the Goodlife Gyms chain.

However, the real growth engine of the company in coming years will be the rollout of its profitable and market leading Main Event family entertainment centres in the United States. The company already has a strong position in the Southern states, and is aggressively expanding the number of locations in the Mid-West and other parts of the country.

Leveraged to an improving US economy and a falling Australian Dollar, Main Event is the primary reason an investment in Ardent will be attractive for some time to come.

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Motley Fool contributor Ry Padarath owns shares of Challenger Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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