‘Rerating likely’: 2 ASX shares to buy before they take off

The warning “past performance is not an indicator of future performance” is heard so frequently in finance circles that most investors gloss over it without much thought.

But it’s true. 

The only thing that matters when you buy ASX shares is what the future brings, not what the stock did in the past.

When many investors see a tech stock like Aussie Broadband Ltd (ASX: ABB) sink terribly to the tune of 40% over the past year, they stay away.

But this is when bargains can be nabbed, if the business has positive prospects for future growth and earnings.

Improving the quality of its clientele

The analysts at QVG Capital, for example, revealed that they have “materially increased” their Aussie Broadband holding in the past month, despite the share price falling more than 8% in that time.

In a memo to clients, the team admitted the bread-and-butter business is actually not that alluring. 

“Aussie is best known as an NBN reseller. This is not an attractive business.”

However, the QVG analysts’ conviction comes from the side of the company that the public rarely sees.

“The thing that attracts us to Aussie is that they have been investing in their own fibre backhaul and have been growing their business and government division,” read the memo.

“Business and government customers typically have lower churn and higher average revenues while on-net fibre margins can be 3x those of reselling NBN.”

These slow-burning activities will eventually trigger a rude wake-up call for the market, the QVG team believes.

“As Aussie’s revenue and earnings mix moves more towards the higher quality business and government division, we believe a re-rating of the company is likely.”

‘The right call is to back them for the future’

On the other end of the spectrum, electrical equipment provider IPD Group Ltd (ASX: IPG) has enjoyed an incredible doubling of its share price over the past 12 months.

But this past performance doesn’t mean that its run is over.

“It has been the right call for these guys to back themselves over the last decade,” read the QVG memo.

“We believe that as they continue to take both employees and market share from the competition the right call is to back them for the future.”

The team confessed that it’s not the sort of company it normally goes for.

“[IPD] is an atypical holding for us given they don’t own their own brands and rely heavily on a key supplier,” the memo read. 

“Despite this, we see an undemanding valuation for a business that has proven they can grow revenue in the teens and produce EPS growth well in excess of that with sensible acquisitions.”

The QVG analysts like that the IPD executive team seems to be “creating a more responsive culture” to deal with foreign competitors.

“We also like that their main OEM supplier is severely underpenetrated in Australia relative to the share they have around the globe.”

The post ‘Rerating likely’: 2 ASX shares to buy before they take off appeared first on The Motley Fool Australia.

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More reading

• ’20-fold increase’: 3 ASX shares that’ll rocket sooner or later
• These 3 ASX shares just halved. I would buy one of them: experts

Motley Fool contributor Tony Yoo 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 Aussie Broadband and IPD Group. The Motley Fool Australia has recommended Aussie Broadband and IPD 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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