Should you buy Coca-Cola Amatil Ltd and Commonwealth Bank of Australia?

Credit: Bill Dan

With the ASX falling by 7% since the turn of the year, it is clear that many investors are pessimistic regarding the outlook for the economy. After all, a weakening China would be bad news for our macroeconomic outlook, since it could cause further declines in commodity prices and the knock-on effects which that would bring.

However, with the economy beating growth expectations in the September quarter, its future performance could be much stronger than many people currently realise. This means that buying a slice of Commonwealth Bank of Australia (ASX: CBA) could be a profitable move, since it has a relatively large exposure to the domestic economy, through personal and business loans.

Clearly, there is a sizeable risk to the economic outlook and, with CBA having raised $5bn through a fundraising last year, it now has a much stronger financial footing. In fact, it now has liquidity coverage which is $22bn higher than the regulatory requirement and has also increased its common equity tier one ratio by 0.7% so that it now stands at 9.8%.

Looking ahead, CBA’s bottom line is forecast to rise by 5.8% per annum during the next two years and, despite the bank’s cost:income ratio being relatively low and indicating a high degree of efficiency, it trades on a price to earnings (P/E) ratio of only 14.5. This is lower than the ASX’s P/E ratio of 15.3 and, with CBA having increased net profit at an annualised rate of 6.8% in the last decade, it could prove to be a relatively resilient bank to own over the medium to long term.

Furthermore, with CBA having a dividend yield of 5.3% (fully franked) and being forecast to increase shareholder payouts by 3.4% per annum during the next two years, it remains a strong income play, too.

Meanwhile, Coca-Cola Amatil Ltd (ASX: CCL) also appears to be worth buying after its 7% fall year-to-date. Unlike CBA, it has considerable foreign exposure and so should benefit from the RBA’s decision to gradually lower interest rates. This has caused a weakening in the Aussie dollar which is set to contribute to a rise in Coca-Cola Amatil’s earnings of 4.9% per annum during the next two years.

Of course, a weaker exchange rate is not the major reason for Coca-Cola Amatil’s improved financial outlook. A new strategy which is being implemented is set to create a more efficient business which is more in-step with consumer demands. As such, new products, smaller serving sizes and a major investment in faster growing markets (such as Indonesia) have put the company on a much stronger long term growth trajectory.

With Coca-Cola having a yield of 4.9% and a beta of 0.6, it remains an appealing defensive stock. Therefore, its shares could outperform a lacklustre ASX this year and, in future years, provide growth and upward rerating potential since Coca-Cola Amatil trades on a price to sales (P/S) ratio of just 1.3.

Despite this, there are 3 other ASX stocks that I believe could outperform CBA and Coca-Cola Amatil.

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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