It may seem as though very few stocks on the ASX offer any kind of upbeat growth prospects at the present time. That’s because with the Chinese economy slowing, volatility in global stock markets being high and commodity prices continuing to come under pressure, fear among the investment community is relatively high. As such, a shorter-term view now dominates.
However, for investors who can look beyond the next few months, a number of stocks offer strong growth prospects and trade on appealing valuations.
For example, Domino’s Pizza Enterprises Ltd (ASX: DMP) is expected to increase its earnings by 32% in the current financial year and by a further 27% in the 2017 financial year. Key to this is an aim to double the number of Domino’s stores across Asia over the medium term, with the company being relatively underexposed in that region in comparison to Europe and Australia.
Furthermore, Domino’s is also intent on undertaking further M&A activity over the medium to long term, as evidenced by its purchase of Pizza Sprint in France last year, as it seeks to consolidate its dominant position in existing markets.
Allied to this is a highly effective marketing campaign which continues to resonate well with Domino’s target range of customers. Extensive use of social media, innovative menu items, simple and regular deals, as well as features such as online updates on the progress made from ordering through to delivery have developed customer loyalty in the brand. And with new menu items likely over the medium term, Domino’s has the scope to grab additional market share from its better established rivals.
While Domino’s has a very bright future, its shares currently trade at a premium to the market. For example, they have a price to earnings (P/E) ratio of 66 versus 15.2 for the ASX. However, with such strong growth potential, Domino’s appears to be a strong buy – especially with its business model proving to be relatively resilient in the face of an uncertain macroeconomic outlook.
Meanwhile, Wesfarmers Ltd (ASX: WES) also appears to be worth buying during the turbulent market conditions which are being experienced. That’s partly because the economy is performing much better than was previously thought, with GDP growth being strong and ahead of expectations in the September quarter. This bodes well for Wesfarmers’ retail divisions which experienced strong first quarter sales.
Although consumer confidence remained above 100 for the second month in a row in December, Wesfarmers benefits from a conglomerate structure which means that if its retail division struggles, it has other divisions to potentially pick up the slack. While it could be argued that a conglomerate structure leads to inefficiencies, it also provides defensive appeal which during a market crash could prove to be invaluable.
With Wesfarmers trading on a P/E ratio of 18.1 it is hardly cheap, but its premium appears to be worth paying for when its earnings growth forecast of 8% for the next financial year is factored in. This, plus a yield of 5%, indicate that total returns from Wesfarmers could be high in the medium to long run.
Despite this, there are 3 other ASX stocks that I believe could outperform Domino's and Wesfarmers.
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.
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Motley Fool contributor Peter Stephens owns shares in Domino's Pizza. 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.