2 shares to buy and 2 to avoid for smart investors

Credit: Telstra

With everything that is going on in the market at the moment, some shares stand out amongst others like diamonds in the rough, whereas some shares feel like you are holding a stick of dynamite and anything could happen. I feel the latter are best avoided.

There are two shares in particular which I would consider to be strong buys at present, representing both good value and great prospects:

Telstra Corporation Ltd (ASX: TLS)

Telstra recently overtook Woolworths Limited (WOW: ASX) to become Australia’s most valuable brand. The telecommunications giant is heavily investing in Asia with its high speed infrastructure, has a dominat position in the lucrative Australian mobile phone market, and a large amount of consumer broadband growth ahead with the roll out of the National Broadband Network. Its earnings are forecast by analysts to grow at 7.5% per year for the next few years, which at a price-to-earnings ratio of 15.9 (close to the market average) puts Telstra at a great price to give potential shareholder gains in the future. This is on top of the already excellent 5.6% dividend yield that I expect to grow by approximately 3% per annum.

Treasury Wine Estates Ltd (ASX: TWE)

Treasury Wine Estates has prospered since it acquired the wine operations of British multi-national alcoholic beverages giant Diageo. Its shares have been on a tear this year and this is largely thanks to the view of analysts that believe Treasury Wine Estates is capable of growing its earnings in the double-digits for the next few years. This growth does not come cheap though, with the shares trading at a price-to-earnings ratio of 42. I feel trading at this level is justifiable, though, as the PEG Ratio comes in at a lowly 0.63. It is worth remembering that wine is a highly-competitive industry with ever-evolving consumer tastes. With its portfolio of brands, Treasury Wine Estates is perfectly positioned, but not invincible.

At present there are two blue-chip shares trading on the market which jump out as bargains. But with so much uncertainty surrounding them I would recommend avoiding them no matter how cheap they look.

BHP Billiton Limited (ASX: BHP)

It seems that things just keep going from bad to worse for BHP Billiton. Most recently it had its credit rating cut, this now means that any debt it takes on will be at a higher rate than previously. This puts even more pressure on the company to cut its progressive dividend, which at present yields a fully-franked 8.9%. If you could call the bottom of BHP you’d almost certainly make a lot of money, but the economic uncertainty that has rattled commodity prices makes this virtually impossible.

Australia and New Zealand Banking Group (ASX: ANZ)

Of all Australia’s big four banks, ANZ has been touted as the most likely to slash its dividend. Despite many market commentators believing the potential dividend cut is partly to blame for the shares’ rapid descent, I still feel the shares could drop further in the event of a cut. Asides from this, there are fears of overexposure to the housing market, and should house prices drop, bad debts would most probably begin to rise. As well as housing, ANZ has a lot of exposure to Asian markets. The slowdown that we are seeing there could have a negative effect on the bank’s bottom line moving forward.

Foolish takeaway

These volatile markets have brought a lot of shares down to their knees and presented investors with a lot of potential bargains. Just remember that not everything that is cheap is good value.

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Motley Fool contributor James Mickleboro 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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