The S&P/ASX 200 Index (ASX: XJO) is full of a number of ASX blue-chip shares that are quality and have done wonders for shareholders over the long term. In this article, I'm going to talk about two ASX 200 shares that I think have the potential to beat the market.
With all of the competition in the lending space, I'm not sure that ASX bank shares will be able to generate solid investment returns going into the future than they have historically, especially with the prospect of lower margins.
I think it's also worth questioning whether ASX mining shares like BHP Group Ltd (ASX: BHP) are going to be able to generate as strong a profit in the future. China has gone through a gigantic construction boom – will the iron ore price get to US$150 per tonne in the foreseeable future?
With the ASX 200 significantly weighted to ASX bank shares and ASX mining shares, it may be a good idea to look at other sectors for opportunities. That's why I'm attracted to these two ASX 200 share names.
Metcash Ltd (ASX: MTS)
Metcash supports a number of independent retailers with its food and liquor brands. It supplies IGA supermarkets around Australia, as well as IGA Liquor, Cellarbrations, The Bottle-O, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
The hardware division has a number of different brands including Total Tools, Home Timber & Hardware, and Mitre 10.
There's a useful tailwind for the business with Australia's growing population because it means there are more mouths to feed and more homes that need building.
I believe that Metcash's earnings can be very resilient in the face of a possible economic downturn after all of the interest rate rises and inflation because of the nature of what it supplies.
One of the most useful things to know for Metcash is that its FY24 sales have started off with more growth. In the first seven weeks of FY24, total sales were up 2.3%. Food sales increased 6.8% excluding tobacco, or 2% including tobacco. Hardware total sales were up 5% and liquor sales were up 1.2%. This will be supportive for profit this year.
According to Commsec, the Metcash share price is valued at just 12 times FY24's estimated earnings with a forecast grossed-up dividend yield of 8.2%.
Wesfarmers Ltd (ASX: WES)
Wesfarmers is the other ASX 200 share I'm going to talk about.
Bunnings is one of the best businesses in the country in my eyes. It generates an impressive return on capital (ROC) for shareholders – in the FY23 half-year result, it made a ROC of just over 70%. As the business re-invests in itself, it's adding a lot of value.
One of the most attractive things about Wesfarmers is that all of its main divisions make good ROC. Kmart Group made a ROC of 43.3% in HY23 and Wesfarmers chemicals, energy and fertilisers (WesCEF) made a ROC (excluding ALM) of 40.3%.
A high ROC is a great sign, and it means it's appealing for the business to keep investing.
The ASX 200 share is steadily investing in its core businesses while expanding into new areas such as healthcare.
I'm excited by the potential of the Mt Holland joint venture project that Wesfarmers owns half of, which could add a billion dollars of annual earnings to the business when it's completed.
Wesfarmers' main businesses, particularly Bunnings and Kmart, may be able to capture more consumer dollars.
According to Commsec, the Wesfarmers share price is valued at under 23 times FY23's estimated earnings with a possible grossed-up dividend yield of 5.5%.
