There’s some good news and bad news. The good is that our market has finally broken its seven-day losing streak with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) inching up into the black in afternoon trade.
While it’s encouraging to see the top 200 index gaining 0.1% at the time of writing, the bad news is I don’t think we’ve seen the bottom of this sell-off yet.
But this doesn’t mean investors shouldn’t keep an eye on the potential bargains on offer. The fact is, I see this as only an interruption and not an end to our bull market as we will need to see shrinking corporate profits and a big drop in global economic growth for a bear market to return.
Right now, profits and growth are still heading in the right direction and that means we can expect equites to outperform most other asset classes for the next 6 to 12 months, at least.
However, I would be more focused on value stocks at this stage of the market cycle. This isn’t to say stocks on high price-earnings (P/E) multiples, like hearing aid maker Cochlear Limited (ASX: COH) or tech superstar Appen Ltd (ASX: APX), won’t do well, but I think stocks trading at below historic or market valuations will provide better bang for your investment dollar over the coming months.
On that note, Morgans thinks there are three value large-cap buys that stand out following the reporting season as the broker voiced concern about the over-stretched valuations on growth, or high P/E stocks.
“Investors warmed to in-line results from ‘value’ names which had been long overlooked among telco, media and retail. However, the record valuation divergence between high P/E and low P/E stocks further widened in August with the top quartile of high P/E stocks surging to 32x (from 29.5x) versus the bottom quartile, which expanded to 16x (from 15x),” said the broker.
“In many cases, this P/E expansion wasn’t supported by a rise in consensus profit expectations, which concerns us.”
This is why we may be better off looking for buying opportunities among the underperformers and one such stock is our largest telco Telstra Corporation Ltd (ASX: TLS), according to Morgans.
The proposed merger of TPG Telecom Ltd (ASX: TPM) with Vodafone is expected to remove competitive tension in the industry and Telstra’s latest update showed things aren’t getting worse.
Another value buy on Morgan’s list is Westpac Banking Corp (ASX: WBC) even as the banking sector remains out of favour with many investors in light of the revelations from the Banking Royal Commission and slowing housing market.
But the broker sees Westpac as being “relatively low-risk” in terms of its loan book positioning and its small reliance on treasury and markets income.
Another value buy to keep your eye on is share registry services group Link Administration Holdings Ltd (ASX: LNK).
“We still see LNK’s current trading multiple as undemanding for a company with its track record and its level of free cash flow generation,” added Morgans.
“We also see areas of potential upside including executing on expanding LAS in Europe and realisation of value from assets like PEXA.”
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Motley Fool contributor Brendon Lau owns shares of Telstra Limited, TPG Telecom Limited, and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Cochlear Ltd. 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.