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2 S&P/ASX 200 (Index:^AXJO) (ASX:XJO) shares with big upside

The market might be starting to look fully valued to many even as the reporting season is largely delivering to expectations, but there are still a handful of stocks with significant room to climb before reaching fair value.

Better yet, these stocks aren’t in the mining or oil and gas space which will require the co-operation of commodity prices to surge materially higher from here.

The first is gaming machine maker Aristocrat Leisure Limited (ASX: ALL) even though its share price has surged 44% to $30.95 over the year compared to a 10% gain on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

But the stock has been giving ground since the start of the month as some investors believe its losing market share growth momentum in the US after its key rivals reported better-than-expected growth for their gaming machines.

You can’t blame shareholders for taking some chips off the table with the stock trading on a FY19 consensus price-earnings multiple of around 22 times.

But I think there’s lots more room for the stock to climb and the latest note from Deutsche Bank adds to my confidence that the stock will keep outperforming over the medium-term.

“While ALL’s competitors are showing signs of life, the improvement is limited to a few titles, game libraries are limited and regulatory approvals for new hardware and software are taking longer than anticipated,” said the broker.

Meetings Deutsche had at the Australian Gaming Expo supports the view that Aristocrat’s Australian earnings are set to keep growing and the market is well behaved with normal levels of discounting and little price resistance.

The broker may be ahead of consensus on the company’s FY19 profit forecasts, but it believes the stock will need to race up another 34% before it reaches fair value.

Another stock that I think can outperform the market is engineering and construction group Downer EDI Limited (ASX:DOW).

It may not be able to generate returns quite as high as Aristocrat over the next 12 months but its profit results yesterday show its well placed to benefit from a number of tailwinds in our economy.

Its share price is only just starting to perform to my expectations as it rallied 2.3% in after lunch trade to $7.69 but it is only just keeping pace with gains on the broader market over the last year.

The stock should be running much further ahead given that its earnings are leveraged to the infrastructure building boom and the strong bounce back in mining activity.

I think the stock can produce a total return that’s just over 20% from here if you added in its expected fully franked dividends for FY19.

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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. 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 Scott Phillips.

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