2 cheap ASX shares set to take off after COVID-19

Two fund managers have revealed the stocks they think will perform strongly after a COVID-19 solution comes along.

With growth shares taking off since the coronavirus trough in March, it’s difficult for investors to find companies that haven’t already blown up in value.

But TMS Capital portfolio manager Ben Clark and First Sentier Investors deputy head of Australian growth equities David Wilson each reckon they have found one.

Mining without the mineral price rollercoaster

Clark tipped Deterra Royalties Ltd (ASX: DRR) for a rosy future in the post-virus world.

“One stock we’ve started buying is a company called Deterra, which has just been spun out of Iluka Resources Limited (ASX: ILU),” he said on a Livewire video.

“It owns a mining royalty over some land that BHP Group Ltd (ASX: BHP) mines in, and BHP’s going to almost triple its output from Mining Area C over the next 3 years.”

The advantage of a mining royalty company is that it’s not exposed to wild fluctuations in the global minerals market.

“You’re almost certainly going to see very strong growth in their underlying earnings even if we see quite a significant pullback in the iron ore price,” Clark said.

The company only listed on the ASX a month ago, starting at $4.87 a share and a market capitalisation of $2.57 billion. The stock has since dipped to $4.36 as of Monday afternoon.

The current price is very tempting, according to Clark.

“When you can compare it to the royalty companies that trade in Toronto and in New York, it looks quite cheap,” he said.

“We would argue it’s probably one of the highest quality mining royalty streams anywhere in the world, given the counterparty, the production growth, the length of the asset.”

Pivoting for the future

Wilson’s tip for growth was gaming provider Aristocrat Leisure Limited (ASX: ALL), which made its name in the past for poker machines.

“A little while ago they took the bold step to actually step away from their traditional business and move into the digital space,” Wilson said.

“That digital part of their business is now 40% of their earnings.”

The Aristocrat share price peaked at $37.43 in February before sinking to $17.54 in March during the COVID-19 panic. It is now back at $33.88.

The pivot was “a brave decision”, according to Wilson.

“They said ‘No, we need to step away from our core business, but try and get to where our business is going to be in 10 years’ time’. It’s going to be rough at times, but I think you can’t fault the way that they’ve executed thus far.”

Both fund managers said Australian stocks have excellent prospects compared to their northern hemisphere counterparts.

“We’re lucky we’ve got a great system here. Investors were happy to stump up quite significant amounts of cash in a pretty scary period. It allowed companies to get through,” said Clark.

More reading

• Top brokers name 3 ASX shares to buy next week
• Could the Aristocrat (ASX:ALL) share price be a leading ASX 200 growth share?
• Why the Aristocrat Leisure (ASX:ALL) share price can go higher from here
• ASX 200 rises again on Wednesday
• Why Aristocrat Leisure, Chalice Gold, Westpac, & Whitehaven Coal shares are charging higher

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. 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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