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2 screaming bargains I’d buy with $10,000: Wesfarmers Ltd and QBE Insurance Group Ltd

Deciding which shares to buy can be a challenging process. What makes it all the more difficult is that the outlook for the ASX is decidedly uncertain at the present time. On the one hand, China’s economy continues to offer a slowing rate of growth which could impact negatively on resources companies and cause the domestic economy and ASX to endure further challenges ahead.

On the other hand, though, the Australian economy recently beat GDP growth expectations and consumer confidence improved by almost 4% versus the previous month. Both of these indicators show that the future for the ASX could be a lot brighter than is currently anticipated by many investors.

Of course, by focusing on valuations and on the potential risks and rewards which may lie ahead for a business, it is possible to unearth the best stocks to buy with $10,000. For example, Wesfarmers Ltd (ASX: WES) currently trades on a price to sales (P/S) ratio of just 0.7, which is less than half that of the ASX. Certainly, its future performance is highly uncertain given the tremendous impact which no-frills operators such as Aldi and Costco have had in recent years. And, with a potential price war lying ahead, sales and margins at Wesfarmers could come under pressure.

Despite this, Wesfarmers was able to deliver upbeat first quarter sales figures, with its home improvement division in particular performing well. Furthermore, as mentioned the outlook for the domestic economy and in particular consumer sales may be more positive than is currently being priced in by the market. This may lead to improved sales for Wesfarmers as consumers become less price conscious due to an improving outlook for their household budgets.

As such, Wesfarmers’ earnings growth prospects of 4.1% per annum during the next two years as well as a yield of 5.2% could prove to be positive catalysts for the company’s share price.

Similarly, QBE Insurance Group Ltd (ASX: QBE) could be a star buy even though its recent quarterly results were somewhat disappointing. While QBE now expects its transformation program to be delivered at a slower pace and its gross written premiums to come under pressure, the company’s current valuation appears to price these challenges in. For example, QBE trades on a price to earnings growth (PEG) ratio of 0.66 compared to a PEG ratio of 1.22 for the ASX.

In addition, QBE’s overall progress remains relatively sound, with it having disposed of non-core assets and being in the process of cutting its costs. In fact, QBE’s bottom line is forecast to be over 50% higher in 2016 than it was in 2014, which indicates that investor sentiment could improve so as to continue the company’s 12% share price rise since the turn of the year.

Looking further ahead, QBE has growth potential across the emerging world, where the prevalence of financial products is relatively low, as well as the scope to provide an improved multi-channel distribution approach in Australia and New Zealand.

Despite this, there is another ASX stock that I believe could outperform QBE and Wesfarmers.

In fact, it's recently been named as The Motley Fool's Top Dividend Stock For 2016 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about it.

Click here to do so - it's completely free and comes without any obligation.

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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