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Should you buy shares in Telstra Corporation Ltd or Wesfarmers Ltd?

Credit: Telstra

Despite picking up in recent days, the ASX is still down by 7.5% in the last six months. As a result, it is understandable that many investors are feeling rather lukewarm regarding the prospects for capital growth in 2016 and beyond. After all, the Australian economy is enduring a challenging period and, with China also reporting a downward trend of growth, there is a good chance that the current slowdown will continue over the medium term.

As a consequence, today may not appear to be a good time to buy stocks since their share prices may fall in the coming months. However, there are a number of high-quality companies with sound long-term strategies and which offer wide margins of safety.

A prime example is Telstra Corporation Ltd (ASX: TLS), which is in the process of gradually repositioning itself as a much more diversified communications company, while also attempting to maintain its dominant position in the Australian mobile market.

Clearly, diversification for a company of Telstra’s size makes sense. Its desire to access higher growth rates in the Asian economy (from where it is aiming to derive a third of its sales within five years) is also logical due to its relatively high degree of reliance on the domestic economy which, as mentioned, may disappoint in terms of its growth rate moving forward.

And, with the health care space likely to benefit from a demographic tailwind in the form of an ageing population, Telstra’s step into e-health care is also a sound move which has the potential to not only boost profitability, but to also make its earnings less positively correlated with the wider economy.

Meanwhile, Telstra also offers a fully franked yield of 5.7% which is 110 basis points higher than the wider index’s yield. And, with its shares trading at a slight discount to the market based on a price to earnings (P/E) ratio of 15.6 versus 15.8 for the ASX, Telstra appears to have upward rerating potential, too.

Also offering a high total return is Wesfarmers Ltd (ASX: WES), with its recent quarterly sales figures highlighting its strong relative performance during a challenging period for retailers. In fact, Wesfarmers’ various retail divisions performed well, with home improvement company Bunnings being a standout performer with a rise in sales of 11.6%, versus the comparable quarter from the previous financial year. This, plus positive performance elsewhere, means that Wesfarmers is forecast to increase its bottom line by almost 8% in the next financial year.

Realistically, such strong growth may not be possible if the economy sinks into a recession. However, with Wesfarmers having a conglomerate structure it should be better diversified and protected against a weak economic outlook than most of its index peers. And, with its shares having a price to sales (P/S) ratio of only 0.7 versus 1.4 for the ASX, good value appears to be on offer – especially when Wesfarmers’ fully franked 5.1% yield is taken into account during a period of low interest rates.

Despite this, there is another ASX stock that I believe is an even better buy than Wesfarmers and Telstra.

It has recently been named as The Motley Fool's Top Stock For 2015 and could make a real impact on your bottom line in 2015 and beyond. 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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