The PolyNovo Ltd (ASX: PNV) share price may have jumped 56% over the last 12 months, but one fund manager believes it can still go higher.

Who is bullish on PolyNovo?

According to a recent update by the DNR Capital Australian Emerging Companies Fund, it has recently initiated a position in PolyNovo.

PolyNovo is the medical device company behind the NovoSorb technology, which was developed by CSIRO following the Bali bombings.

NovoSorb is a biodegradable material that can be used to aid the repair of bone fractures and damaged cartilage, and in skin grafts.

The key product in its portfolio is the NovoSorb Biodegradable Temporising Matrix (BTM) product. NovoSorb BTM is a wound dressing intended for treatment of full-thickness wounds and burns where the dermal structure has been lost to trauma, or damaged requiring surgical removal.

Why is PolyNovo undervalued?

DNR Capital believes that PolyNovo is undervalued based on its future cash flows.

It commented: “We believe Polynovo shares are undervalued based on our assessment of long-term cash flows. The company has a leading product that is in the early phase of its penetration into a large addressable market of $1.5b.”

It’s worth noting that DNR Capital isn’t including other markets that the company has its eyes on. Adding these into the equation would increase its addressable market opportunity to an estimated $7.5 billion per year according to management.

DNR Capital explained: “We don’t ascribe value to the hernia and breast opportunities given the limited visibility on cash flows, as these products need to pass certain milestones before they become commercial.”

In addition to this, the fund manager notes that PolyNovo’s earnings growth potential is very strong and its outlook is increasingly positive.

“With the business now at a cash-flow break even run-rate, we expect significant earnings growth as it penetrates a large addressable market estimated at $1.5b. The business generates attractive gross margins of 90%, which will lead to high returns on invested capital.”

“The company continues to reinvest into research and development with a number of new products to be launched targeting the hernia and breast market, with the combined opportunity valued at $6b,” it added.

Should you invest?

I think DNR Capital makes some great points and PolyNovo could be well worth considering with a long term view. Though, given the premium that its shares trade at, you might want to consider limiting an investment to just a small part of your portfolio.

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Motley Fool contributor James Mickleboro 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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I believe the Telstra Corporation Ltd (ASX: TLS) share price could hit $4 in 2020.

Let’s be clear, this isn’t an earth-moving price target. Telstra shares have been at $4 before, most recently in August last year. Before then, the ASX telco giant actually spent between 2012 and 2017 above $4 per share, even hitting $6.50 at one point in 2015. We were getting close to $4 in January this year (Telstra touched $3.90), but then the coronavirus pandemic hit and Telstra has been stuck in a rut at around $3.20 ever since. Right now, one Telstra share will set you back just $3.17.

So why do I think Telstra shares can make it back to $4 and potentially beyond in 2020?

There are two reasons:

Telstra shares and dividends

The first is Telstra’s dividend. This company has quite an infamous history when it comes to dividend payments. Some shareholders might still not have forgiven Telstra for slashing its dividend back in 2017 from 31 cents per share (annually) to 16 cents today. It’s my view, this was partly behind Telstra’s massive re-valuation between 2015 and 2018.

But Telstra has managed to keep it’s dividend steady at 16 cents per share for close to two years now, and I don’t believe there is any danger this will be cut down any further. For one, the dividend is comfortably covered by Telstra’s free cash flow. And two, the company is close to putting the damage done to its earnings by the NBN behind it.

So what’s so good about Telstra’s dividend then? Well, at 16 cents per share (which includes 6 cents in ‘special’ NBN dividends), Telstra is offering a 5.05% dividend yield. If you include the full franking that Telstra shares also come with, this grosses-up to 7.21%. That’s not a bad yield in a zero interest rate environment.

What about 5G?

The second reason I believe Telstra shares could reach $4 this year is the rollout of the new 5G mobile technology. 5G is the next generation of mobile network and promises unprecedented speeds, low latency and increased applications. We don’t know for sure just how many benefits 5G will bring to the table, but if the rollout of 4G a few years ago is anything to go by, it looks likely to be good news for all ASX telco companies. And Telstra looks set to be in prime position for this shift. It is investing more into 5G than its competitors, from what I can see, which could see better speeds and range for Telstra’s 5G network compared with anything Optus or TPG Telecom Ltd (ASX: TPM) delivers.

Foolish takeaway

All in all, I think Telstra’s healthy dividend policy, as well as its investment in 5G technology, could well see the Telstra share price hit $4 again in 2020. As such, Telstra is a share that I’m very happy to own, and I don’t anticipate this changing anytime soon.

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Motley Fool contributor Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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Over the past few days, it’s dawned on me that the situation regarding coronavirus is unlikely to change anytime soon. Like many others, I thought that by now we would find ourselves opening up our own borders. Then opening up to New Zealand, and then slowly to the rest of the world.

However, the recent surge of coronavirus infections in Victoria has forced us to temper our expectations on how quickly we can open up the economy and our borders. If we’re going to continue managing this pandemic successfully, then potentially we may need to be taking two steps forward and one step back for some time.

While none of us can do anything about this, we can definitely shape our investment portfolios to reflect our circumstances. So on that note, here are some of my thoughts.

Sectors to consider for your investment portfolio

Local travel

I believe that Alliance Aviation Services Ltd (ASX: AQZ) is likely to be the only airline to deliver anywhere near decent earnings over the short term. This company recently forecast a year-end profit before tax of $40 million. The core business of Alliance Airlines is providing charter flights and servicing fly-in fly-out workers. Demand for these services increased during lockdown restrictions as travellers were forced to comply with social distancing requirements.  

Alliance Airlines’ recent award of flights to the Whitsundays by the Queensland Government further reinforces my optimism surrounding this Aussie airline. Alliance is structured as a nimble organisation with a low cost base. If we do have to live only with domestic tourism for a while, I believe the company will prosper. Conversely, an organisation like Qantas Airways Limited (ASX: QAN) is just too big to survive on local flights alone.

Another potential beneficiary of an increased concentration of local travel could be Bapcor Ltd (ASX: BAP), a distributor of car parts and services. If, for the time being, most travel will be local, it stands to reason much of it will be by car. This definitely appears to be increasing demand for Bapcor’s automotive parts, accessories, equipment, and services. Back in March, when the lockdown commenced, Bapcor still managed to deliver an 11.5% growth in revenue against the previous corresponding period.

Discretionary items

I think ongoing work-from-home requirements will mean continued solid sales volumes for retailers like Bunnings and Officeworks; businesses owned by Wesfarmers Ltd (ASX: WES). Wesfarmers also owns Catch, an online marketplace it recently purchased. Catch has increased its sales turnover by 68.7% in H2 FY20 so far against the previous corresponding period. This is in line with other online sales businesses like Kogan.com Ltd (ASX: KGN).

Another interesting internet sales story has been City Chic Collective Ltd (ASX: CCX). On 25 May, the company declared that two-thirds of its sales came from online channels. Moreover, it announced a 57% increase in online sales during the company’s store closures versus the same period last year.

Payment processing

Depending on your investment horizon, it may still be too soon to invest in shares like Commonwealth Bank of Australia (ASX: CBA). In fact, I would be cautious of any shares with exposure to the long-term credit commitments of the general public. With higher unemployment and uncertain economic conditions, I believe fewer people will be seeking long-term credit arrangements.

In addition, as the nation’s largest bank, CommBank is also potentially facing the biggest impact of defaults on housing and business loans. Moreover, there is an underlying trend away from credit cards, particularly among millennials. 

Nonetheless, I think short term credit organisations like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are likely to continue to do well. Particularly those that are light on credit checks. 

Payment processing companies like Tyro Payments Ltd (ASX: TYR) are also destined to continue performing well, in my opinion. Tyro has a network across many small and medium enterprise companies, many of which have already re-opened. Furthermore, the company has increased YTD earnings by 16% against last year during April and May, despite lockdowns restrictions.

In just a few years, Tyro has catapulted itself to be the largest EFTPOS provider of all authorised deposit-taking institutions (ADI) outside of the big four banks.

Foolish takeaway

The resurgence of coronavirus cases in Victoria this week suggests the recovery is not going to play out the way we might have hoped. Nonetheless, the market continually provides us with opportunities.

I recommend pivoting an investment portfolio towards companies with strong online sales capabilities, or those which have thrived during the lockdown. In addition, look for companies that do not require a full re-opening of the Australian or international economies in order to thrive, such as the buy now, pay later providers.

More reading

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Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Tyro Payments and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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