Why I’m watching these ASX All Ordinaries shares like a hawk

As the effects of soaring inflation and rising interest rates reach far and wide, the S&P/ASX All Ordinaries Index (ASX: XAO) has been left in a tizzy.

The ASX All Ords index has shed nearly 9% this year. Meanwhile, the S&P/ASX All Technology Index (ASX: XTX) has slid 28%.

Amidst the volatility, I’m on the hunt for high-quality ASX shares to add to my portfolio.

In my eyes, a high-quality company is a proven performer with sustainable competitive advantages, a healthy balance sheet, and the ability to generate large amounts of free cash flow.

Competitive advantages come in different shapes and sizes. But it’s likely that a high-quality company benefits from a combination of the following traits:

• Market leader
• Brand power
• Pricing power
• Network effects
• Scale
• High barriers to entry
• Mission-critical products/services

These advantages allow businesses to form a competitive moat to not only shield themselves from competition but also continue to grow.

With that in mind, here are two ASX All Ords shares I think fit the quality bill. 

PEXA Group Ltd (ASX: PXA)

PEXA is a cloud-based system that digitally facilitates a range of essential functions in the conveyancing process. Think documents, the transfer of funds and dealings with the relevant land titles office.

Through its roots in government, PEXA has a monopoly in the Australian market. More than 80% of all property transfers in Australia are completed on the PEXA platform, with the balance still going through the traditional, paper-based process. 

PEXA’s competitive moat lies in its first-mover advantage along with various integrations, strategic relationships, and licences, which have taken many years to develop. 

Support from governments, regulatory bodies, and unique founding partners has gotten PEXA to where it is today: a supremely dominant position in the Australian market. 

With the local market all but gobbled up, PEXA is turning its attention abroad to the UK, a country with more than double the population of Australia. 

It’s secured key agreements with the Bank of England and Her Majesty’s Land Royalty. And after successfully completing testing with several lenders, the platform is preparing to go live at the end of the year. 

PEXA’s UK efforts will first start with refinancing transactions. The company hopes this will serve as a springboard into the lucrative property transfer segment.

As was the case in Australia, PEXA will be breaking new ground in the nascent UK digital property landscape.

According to our Foolish ASX reporting season calendar, PEXA will reveal its FY22 results tomorrow. 

Some of the things I’ll be watching are the company’s topline growth, market penetration, gross margins, and cost base.

Going forward, I think it’s also worth keeping an eye on interoperability and competition in Australia, as well as movements from regulators both here and in the UK.

Pro Medicus Limited (ASX: PME)

Pro Medicus is a global leader in radiology imaging software through its Visage technology.

The company’s flagship Visage 7 solution lets radiologists and other doctors send and receive medical images (with very large file sizes) to a variety of devices.

Legacy systems would store these images locally in the hospital and the images would take seemingly forever to send from one place to the next.

Instead, Pro Medicus streams the pixels rather than moving the file. What was formerly a clunky, time-consuming and inefficient process can be done in seconds. Radiologists can then view and manipulate these files with ease, helping them make a diagnosis.

Pro Medicus’ software is great for patients. But it could be even better for doctors. Hospitals have reported spending less on IT overheads, increased radiologist productivity, increased accuracy, and the benefit of being able to scale their services.

Pro Medicus’ impressive results

The ASX 200 healthcare share released its FY22 report last week, and its quality was on full display.

Yet again, net profit after tax (NPAT) grew faster than revenue as the company’s tremendous operating leverage continues to shine.

As a software-only business, Pro Medicus reaps the benefits of ultra-high gross margins. But even better is how this gross profit flows through to the bottom line. 

Pro Medicus boasts extremely wide profit margins, with two-thirds of every sales dollar turning into profit before tax. What’s more, these margins have only been heading higher over time.

The company continues to sign marquee customers on long-term contracts and bring new products to market.

Yet it estimates it has just a 5% market share of exam volume in the US. In other words, there’s still a long runway for growth ahead.

The company also boasts extremely high customer retention rates and a strong base of forward revenue. 

For me, the sticking point with Pro Medicus shares is valuation. The company currently trades on a price-to-earnings (P/E) ratio of 121x, implying very high growth expectations going forward. 

As the great Charlie Munger says, no matter how wonderful a business is, it’s not worth an infinite price. So despite its quality, I’ll continue to watch Pro Medicus shares from the sidelines for now.

The post Why I’m watching these ASX All Ordinaries shares like a hawk appeared first on The Motley Fool Australia.

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• 3 ASX All Ordinaries shares trading ex-dividend today
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• Pro Medicus share price tipped to rise amid ‘strong long-term growth story’
• Brokers name 3 ASX shares to buy today

Motley Fool contributor Cathryn Goh 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 PEXA Group Limited and Pro Medicus Ltd. The Motley Fool Australia has positions in and has recommended Pro Medicus Ltd. 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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