Day: 18 May 2023

If you’re wanting to strengthen your portfolio with some quality ASX 300 shares, you may want to look at the two listed below.

Both have recently been named as buys by leading brokers. Here’s why they could be buys:

TechnologyOne Ltd (ASX: TNE)

The first ASX 300 share to buy and hold could be enterprise software provider Technology One.

It has really caught the eye in recent years thanks to its ongoing transition to a software-as-a-service (SaaS) focused business. This transition has been very successful so far and management appear confident this positive trend will continue in the coming years. So much so, the company is aiming to almost double its annual recurring revenue (ARR) to $500 million by FY 2026.

The team at Bell Potter is very positive on Technology One and believes it could achieve its target a year earlier than planned. As a result, it suspects that a guidance upgrade could be coming in the near future. It said:

We also continue to forecast total ARR of $385m, $452m and $535m at the end of FY23, FY24 and FY25. That is, we already forecast Technology One will achieve its $500m+ total ARR target in FY25 and hence why we expect the company to bring forward this target by a year at some stage this calendar year.

Bell Potter currently has a buy rating and $17.00 price target on its shares.

Temple & Webster Group Ltd (ASX: TPW)

Another ASX 300 share that could be a great buy and hold option is Temple & Webster. It is Australia’s leading pure-play online retailer of furniture and homewares.

Goldman Sachs is a big fan of the company due to its huge long term market opportunity.

The broker highlights that Temple & Webster has a leadership position in a retail category that is still only in the early stages of shifting online. In addition, it believes the company is well-placed due to the category’s high barriers to entry and its specialised approach to e-commerce. It explains:

We see a long term structural growth opportunity driven by increasing online penetration and consolidation of online market share. We think TPW is best placed to be a winner in a category that favours scale players, requires a specialist approach to e-commerce and logistics, has higher barriers to entry vs. other categories.

In response to the company’s trading update this week, the broker has increased its EBITDA compound annual growth rate (CAGR) estimate to 23.6% between 2022 and 2025.

Goldman has a buy rating and $6.40 price target on the company’s shares.

The post Analysts name 2 excellent ASX 300 shares to buy and hold appeared first on The Motley Fool Australia.

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More reading

• Why Life360, Pointsbet, Serko, and Temple & Webster shares are racing higher
• 2 ASX All Ordinaries shares making big moves on trading updates
• Could ASX shares turn a $10,000 investment into $2,000,000?
• Leading brokers name 3 ASX shares to buy today
• Here are the 10 most shorted ASX shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Technology One and Temple & Webster Group. The Motley Fool Australia has recommended Technology One and Temple & Webster Group. 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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Many of the most impactful risks tied to investing in publicly listed companies are on full display. Whether it is an unprofitable business model, a questionable balance sheet, or a declining market share, these are all obvious areas to evaluate an ASX stock.

One less obvious metric that rarely receives the attention it deserves is the company’s share count. Not just the present number of shares outstanding, but the evolution over the past five to 10 years. Has it dramatically increased, or has it been kept on the straight and narrow?

The danger of shareholder dilution can have disastrous consequences for long-term investors.

How does it quietly consume wealth?

Fractional ownership of a company is only possible through the use of shares.

They are a claim to a piece of the business, allowing numerous shareholders to reap the rewards of its future success. The more shares you own, the bigger the claim to future earnings.

The total number of shares in a company can change over time as needed. For example, an ASX-listed company might issue additional stock to raise capital. Or, additional shares might be created by incentivising employees with stock-based compensation.

This can be worrisome for those already invested.

Like enjoying a bottle of red among friends… if another glass turns up, that means less red going into yours. Another five? Well, it might more closely resemble a shot.

Now imagine the glasses are the number of shares on issue and the wine is company earnings — that’s dilution!

If an ASX stock you own continuously increases the share count over time, your share of earnings will grow smaller and smaller. And, where earnings per share (EPS) goes, the share price will eventually be sure to follow.

The only way a higher share count can be negated — without buying more shares — is for the company to grow earnings above the rate of dilution.

Beware the serial diluter

Avoiding every company that increases its share count is not the answer. There are situations where issuing new shares is necessary. What matters is whether it is being done in a sustainable and shareholder-friendly way.

It all comes down to the capital allocation of the management team. Opportunities will arise when diluting shareholders by 3% might be worthwhile. If an acquisition can deliver 5% earnings growth, a 3% dilution could be justifiable.

The real wealth destroyer is when new shares are issued and EPS growth doesn’t eventuate. Worst still… earnings decline. In that scenario, there are more wine glasses and less wine to go around — devastating!

Take Insignia Financial Ltd (ASX: IFL) for instance. The total number of shares on issue in this ASX stock has more than doubled over the past 10 years. Whereas diluted EPS has decreased by roughly a quarter, as shown above.

In 2017, Insignia (known as IOOF at the time), made an enormous acquisition for nearly $1 billion. Much of the bill was footed by shareholders through the issuing of more shares.

It turns out the deal wasn’t as sweet as what was possibly hoped, with earnings failing to even offset the dilution.

A more exaggerated example is G8 Education Ltd (ASX: GEM). This ASX stock has tripled the number of shares on issue over the past decade. In return, profits have almost halved compared to 10 years ago.

Most of the dilution came about during the pandemic. However, the trend was present well before lockdowns were a thing.

Over time, the share price bears the consequences of this unruly dilution. Today, Insignia Financial and G8 Education have share prices 50% and 63% lower than where they were in 2013.

What to look for in quality ASX stocks?

The impact of severe shareholder dilution slowly chips away at a portfolio. Fortunately, there are a few traits to look for to dodge this dastardly wealth demise.

Firstly, ASX companies with strong balance sheets are a good place to start. There’s less chance of significant dilution if a business has plenty of cash and minimal debt. This is because the company can fund growth initiatives through its own capital, rather than by diluting yours.

Secondly, seek out companies with a history of minimal, or no, increases in share count. It depends, but 0% to 3% dilution per year is generally acceptable.

Finally, the holy grail… find ASX stocks that decrease the number of shares over time. Typically these are profitable companies with healthy balance sheets, able to conduct share buybacks. By buying back stock, your cut of earnings is increased.

The post Silent wealth eater: The hidden danger lurking in ASX stocks and how to avoid it appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Don’t get duped: Why cheap ASX shares can still rip you off

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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On Wednesday, the S&P/ASX 200 Index (ASX: XJO) had another disappointing session and dropped into the red. The benchmark fell 0.5% to 7,199.2 points.

Will the market be able to bounce back from this on Thursday? Here are five things to watch:

ASX 200 expected to rebound

The Australian share market is expected to have a strong session on Thursday after a stellar night on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the day 40 points or 0.55% higher this morning. In the United States, the Dow Jones rose 1.25%, the S&P 500 climbed 1.2% and the NASDAQ jumped 1.3%. Optimism over a US debt ceiling deal being reached gave stocks a boost.

Xero FY 2023 results

The Xero Limited (ASX: XRO) share price will be on watch today when the cloud accounting platform provider releases its full-year results. According to a note out of Goldman Sachs, its analysts are expecting FY 2023 revenue growth of 29% to NZ$1,410 million and EBITDA of NZ$295 million. It also expects “operating expenses (as % sale) to be lower end of 80-85% range (GSe 81.6%) and c.80% in 2H23 (GSe. 79.5%).” Goldman is then looking for FY 2024 guidance of 17% revenue growth to NZ$1.65 billion.

Oil prices jump

ASX 200 energy shares Beach Energy Ltd (ASX: BPT) and Santos Ltd (ASX: STO) could have a great session after oil prices stormed higher on Wednesday night. According to Bloomberg, the WTI crude oil price is up 2.7% to US$72.76 a barrel and the Brent crude oil price is up 2.7% to US$76.90 a barrel. The US debt ceiling deal optimism also boosted oil prices.

Virgin Money shares go ex-dividend

The Virgin Money UK PLC (ASX: VUK) share price is likely to trade lower on Thursday. That’s because the UK bank’s shares are going ex-dividend this morning for its interim dividend of 6.2 cents per share. Eligible shareholders can look forward to receiving this dividend in a little over a month on 21 June.

Gold price falls

ASX 200 gold shares Evolution Mining Ltd (ASX: EVN) and Regis Resources Limited (ASX: RRL) could have a subdued session after the gold price dropped overnight. According to CNBC, the spot gold price is down 0.3% to US$1,986.7 an ounce. Hawkish cues from US Fed officials put pressure on gold.

The post 5 things to watch on the ASX 200 on Thursday appeared first on The Motley Fool Australia.

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More reading

• How might this news out of China impact the oil price?
• Here are the top 10 ASX 200 shares today
• Top broker upgrades AGL share price by 19%
• Top broker forecasts 39% upside for this ASX 200 gold share
• Could ASX shares turn a $10,000 investment into $2,000,000?

Motley Fool contributor James Mickleboro has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. 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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