Why you should buy Woolworths Limited and Ramsay Health Care Limited

Credit: Woolworths

For investors in Woolworths Limited (ASX: WOW) and Ramsay Health Care Limited (ASX: RHC), the outlook is rather different at the present time. In the case of the former, many investors are downbeat regarding its future prospects. That’s because the Australian economy is under threat from a recession and the supermarket sector is becoming increasingly price competitive as consumers trade down to lower cost items as their household budgets come under pressure.

In the case of Ramsay, though, its future prospects are as bright as ever and the company is set to benefit from favourable demographics, with a growing population of older people requiring care and hospital treatment. As such, Ramsay appears to be well-positioned to grow its earnings at a rapid rate and deliver further share price growth following its rise of 25% in the last year.

Woolworths, though, still appears to be a relatively appealing investment. Certainly, things could get worse before they get better since the popularity of no-frills operators is on the up and they are gradually grabbing market share from incumbent operators. And, with a new management team in place, it is likely that significant changes will be enacted which could destabilise the business in the short run.

However, looking further ahead, Woolworths offers capital gain potential as a result of it having a relatively appealing risk/reward ratio. In other words, while there are significant risks, the market appears to have priced these in so that Woolworths now offers a relatively wide margin of safety. For example, it trades on a price to sales (P/S) ratio of only 0.48 (versus 1.39 for the ASX) and has a price to earnings (P/E) ratio of 13.3 versus 15.4 for the wider index.

In addition, Woolworths recently stated that it is on-track with its three-year transformation plan. While it also released a profit warning in October, the current year is set to bear the brunt of the company’s investment in pricing and customer service improvements. As such, and while its short-term appeal may be limited, its valuation indicates that it remains an appealing long-term buy.

Meanwhile, Ramsay continues to go from strength to strength. A key attraction of the company is its international growth prospects, with dominant positions within the French and UK hospital markets likely to be boosted by a weakening Aussie dollar, while the potential for expansion in China remains significant. Furthermore, with Ramsay having a strong balance sheet and significant financial firepower, it could make further acquisitions in future so as to maintain the annualised earnings growth rate of 16.9% achieved over the last decade.

With Ramsay trading on a price to earnings growth (PEG) ratio of 1.58, it appears to offer good value for money. Furthermore, Ramsay’s revenue visibility is high and its income is less highly correlated to the economy than is the case for most of its index peers. Therefore, it offers a mix of stability, growth and value which is likely to be rewarded by the market via a higher share price in the long run.

Despite this, there is another ASX stock that I believe could outperform Ramsay and Woolworths.

In fact, it's recently been named as The Motley Fool's Top Stock For 2015 and could make a real impact on your bottom line as we move through the year. And, in time, it could help you retire early, pay off your mortgage, or simply enjoy a more abundant lifestyle.

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Motley Fool contributor Peter Stephens has no position in any stocks mentioned. 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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