The large end of the Australian share market is looking quite expensive at the moment. I wouldn’t want to invest in the big banks and I’m unsure about Telstra Corporation Ltd (ASX: TLS).
You have to look hard to find good value in the ASX100, but if I were investing $10,000 into large caps, this is how I’d do it:
Healthscope Ltd (ASX: HSO) – $2,500
Healthscope is Australia’s second largest private hospital operator. This may be an unpopular pick considering how poorly the share price and underlying business has performed since listing, but it could be a decent opportunity.
The ageing population is an easy positive to point to, but I like that Healthscope is opening a part private, part public hospital with the upcoming Northern Beaches Hospital in Sydney. If it opens more hospitals with this kind of arrangement it could avoid the private health insurance negatives somewhat whilst benefiting from the ageing tailwind.
However, the underlying business will need to start growing and debt & interest payments could be problematic in a rising interest rate environment. That’s why I’d only allocate $2,500 at today’s price.
Healthscope is trading at 18x FY19’s estimated earnings.
TPG Telecom Ltd (ASX: TPM) – $1,500
TPG is now one of Australia’s largest telecommunication providers. The entire sector has been punished by the market over the past two years, so today’s price is almost the best you could buy TPG at since 2013.
It could have good growth prospects from here with the company investing to start its own mobile networks in Australia and Singapore.
However, the significant capital expenditure and low revenue growth (except through winning market share) could mean market-beating returns are difficult in the short-term.
TPG is currently trading at 17x FY19’s estimated earnings.
Challenger Ltd (ASX: CGF) – $3,000
Challenger is Australia’s leading annuity company, estimates put its market share of new annuities at around 90%. This could edge even higher if it continues to find new distribution partners like the recently-added AMP Limited (ASX: AMP) and BT Investment Management Ltd (ASX: BTT).
The growing retirement population and rising total superannuation pool should mean more funds turn into annuities over time.
Rising interest rates could hurt Challenger due to its large balance sheet, so the share price could fall further in the medium-term, but I think it has good long-term growth prospects, which is why I’d be happy to invest $3,000 today.
It’s currently trading at 14x FY19’s estimated earnings.
Ramsay Health Care Limited (ASX: RHC) – $3,000
Ramsay is Australia’s largest private hospital operator. It has proven that it can generate profit growth in Australia, unlike Healthscope for now, despite the headwinds that the private heath industry faces. However growth in the UK and France is difficult at the moment.
The best time to buy shares of something is when investors are negative about the share. That’s certainly the case now with the Ramsay share price close to a multi-year low. It could go a bit lower in the near-future but I think this business has good enough long-term growth prospects to justify a buy at today’s price.
It’s currently trading at 20x FY19’s estimated earnings.
Three of the four shares I mentioned are exposed to the ageing demographic tailwind, which I think will help those businesses grow in the long-term regardless of what the economy does.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, HEALTHSCPE DEF SET, and Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited, Telstra Limited, and TPG Telecom Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Ramsay Health Care Limited, REA Group Limited, and SEEK Limited. 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 Scott Phillips.