With the ASX falling from a high of 5,992 points in April to its current level of 5,050, a number of high quality stocks are now trading at more appealing levels. One example is telecoms company Telstra Corporation Ltd (ASX: TLS) which is down by 6% since the turn of the year and now trades at only a small premium to the wider index, with its price to earnings (P/E) ratio being 16.2 versus 15.2 for the ASX.
While Telstra continues to be a highly defensive stock due to its dominant position within the Aussie mobile market, its diversification strategy should make the business more resilient and better prepared in case of a recession. This is clearly highly relevant at the present time, with there being a realistic chance that the Aussie economy will post negative growth moving forward.
As such, Telstra's move into areas which are less highly correlated with the wider economic outlook is a sound move, with services such as e-healthcare being among the most defensive around. And, while the economies of Asia are undoubtedly enduring a troubled patch, it remains a relatively greater opportunity for growth. Therefore, Telstra's decision to expand its offering there not only helps to diversify its business, but also generate improved growth numbers after a five-year period where the company's bottom line rose by just 2% per annum.
Similarly, private hospital operator Ramsay Health Care Limited (ASX: RHC) is also targeting sustainable long-term growth and, in its most recent financial year, it approved $197m in spending on brownfield sites to increase its exposure to existing markets. This, combined with a potential tailwind from favourable demographics in countries such as the UK, France and Australia (where populations are ageing) means that demand for Ramsay's services is likely to increase in the coming years and allow it to maintain its 20%+ earnings growth rate over the medium to long term.
Furthermore, with Ramsay targeting further acquisitions following its $620m purchase of a controlling interest in GdS in France, it appears to be well worth the price to earnings growth (PEG) ratio of 1.42 on which it trades. And, with cash flow increasing at an annualised rate of over 19% during the last decade, it appears to have the financial firepower to expand its presence through M&A activity.
Meanwhile, Insurance Australia Group Ltd (ASX: IAG) is also a bargain blue-chip, with its shares trading on a P/E ratio of just 12.7. As well as being below the ASX's P/E ratio, they also offer a discount to the wider insurance sector's P/E ratio of 15.6.
In terms of IAG's performance as a business, its recent half-year results showed that it is making encouraging progress, with gross written premiums increasing by 17%. And, while at least part of this rise was due to the inclusion of the Wesfarmers' business, IAG's underlying margin remains relatively healthy at 13.3%. This indicates that the company's strategy is sound and, with the integration of the Wesfarmers unit proceeding as planned, IAG appears to be in a solid position to develop its Asian business over the medium term.
Furthermore, with IAG offering a dividend yield of 6% versus 4.7% for the ASX, demand for its shares could pickup as interest rates fall – especially since dividends are covered 1.4x by profit.
