Why you should bet on Suncorp Group Ltd and Ramsay Health Care Limited

With the ASX posting a capital gain of just 9% in the last five years, many investors are understandably feeling frustrated with their portfolio returns. After all, the future prospects for the index are as uncertain as ever, with a slowing Chinese economy, commodity woes and an uncertain global outlook causing a high degree of volatility in the ASX.

Looking ahead, further challenges look set to remain, although the recent GDP and unemployment figures highlight that the Australian economy is performing relatively well. Still, buying stable stocks which offer capital growth prospects even if the macroeconomic outlook disappoints could be a sound move.

One such company is private hospital operator Ramsay Health Care Limited (ASX: RHC). In recent years it has expanded geographically so that it now has a major presence in Australia and Europe, with a joint venture in China providing evidence that its long term growth potential is highly appealing.

That’s because, with personal wealth set to rise in the world’s second largest economy, demand for health care is likely to increase, while an ageing population across Europe and Australia could increase Ramsay’s sales and profitability, too.

Furthermore, with Ramsay being geographically spread it offers increased defensive attributes since it is not reliant upon one country for its growth. And, with the Aussie dollar being weaker now than in previous years, its foreign exposure could boost earnings in the short run, too.

With Ramsay trading on a price to earnings growth (PEG) ratio of 1.5 versus 1.4 for the ASX, it has upside potential owing to its excellent track record of profit growth which has seen earnings rise at an annualised rate of 17% over the last decade. Furthermore, additional acquisitions are on the cards following last month’s purchase of HPM Group, with Ramsay’s sound balance sheet and improving cash flow (which has increased by 19.4% per annum over the last 10 years) making further M&A activity highly appealing.

Meanwhile, Suncorp Group Ltd (ASX: SUN) also offers upside potential, with its shares trading on a price to earnings (P/E) ratio of 13.4 versus 15.9 for the ASX and 19.8 for the wider insurance sector. And, with Suncorp being on track to implement major efficiencies which are due to result in cost savings of around $170m by 2018, its bottom line growth rate of 6.3% per annum over the last five years looks set to continue.

Additionally, Suncorp yields 6.4% (fully franked) from a dividend which is covered 1.2 times by profit and is expected to rise by 8.4% in the next financial year. This, plus a beta of 0.9, indicates that Suncorp could be a relatively less volatile option for Foolish investors and also that its total return could continue to beat the ASX as it has done over the last five years by 26%.

Key to this will be the company’s delivery of its stated target of a return on equity of 10%, with a strategy to vertically integrate its general insurance division having the potential to boost profitability further.

Despite this, there are 3 other ASX stocks that I believe could outperform Ramsay and Suncorp.

In fact, they have recently been named as The Motley Fool's 3 Top Blue-Chips 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 them.

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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