The Appen Ltd (ASX: APX) share price has been a strong performer again on Wednesday.

At one point today the shares of the global leader in the development of high-quality, human-annotated training data for machine learning and artificial intelligence were up over 5% to a record high of $35.56.

When Appen’s shares hit that level, it meant they were up 60% since the start of the year.

Why is the Appen share price at a record high?

Investors have been buying Appen’s shares this year after the release of a strong full year result and positive guidance for FY 2020 in February.

In respect to the latter, the company is expecting to deliver underlying EBITDA in the range of $125 million to $130 million this year. This represents a 23.8% to 28.7% increase on FY 2019’s underlying EBITDA of $101 million.

Pleasingly, since February, Appen has been able to reaffirm this guidance twice despite the pandemic. The first time was in the middle of April and the second time was as recently as the end of May at its annual general meeting.

This is quite the opposite of fellow market darling Altium Limited (ASX: ALU), which has made a series of gentle downgrades to its guidance this year because of the pandemic.

How is Appen performing?

At its annual general meeting, Appen spoke positively about current market conditions. And although it notes that there has been a global slowdown in digital ad spending, this has had a minimal impact on its major customers to date.

In fact, demand for its services has been growing strongly. So much so, year-to-date revenue (including any orders in hand for delivery to customers) came to $350 million as of May.

Appen revealed that year-to-date revenue as at May 2020, including any orders in hand for delivery to customers, amounted to around $350 million. This compares favourably with its total revenue of $536 million for the 12 months to 31 December 2019.

It also advised that it is continuing to strengthen its market position through continued investment in technology. It expects this to support it long-term growth trajectory.

Should you invest?

Although its shares are certainly not cheap at 40x estimated FY 2021 earnings, I still see value in them for long term-focused investors.

This is due to the expected growth of the artificial intelligence and machine learning markets and its important position inside them.

I expect demand for its services to increase materially over the next decade and underpin strong earnings growth that ultimately justifies the premium its shares trade at today.

More reading

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• ASX 200 Weekly Wrap: ASX back in the green
• Are these small cap ASX tech shares the next Afterpay or Appen?
• Where to invest $10,000 into ASX shares next week
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia owns shares of Appen Ltd. 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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Is the share market facing another February 2020 moment? COVID-19 infection numbers continue to rise across the world, yet shares keep climbing.

Back in February 2020, COVID-19 was still in its early days of spreading across the world. Italy still only had a few hundred confirmed cases and the US only had a handful of cases. Outside of China, there were only a few thousand confirmed global cases.

But the trajectory of the infection then was clear – it was rising rapidly. That’s what caused the February 2020 market selloff to start.

But the infection trend has been good for quite a while in Europe, North America and Australia, infection numbers were falling. The improving situation was one of the main reasons why the share market has performed so well. The NASDAQ has actually reached a new all-time high, though the S&P/ASX 200 Index (ASX: XJO) hasn’t fully recovered yet.  

But now things are going the wrong way. There are cases of community transmission in Victoria. There are several states in the US like Texas and California which are seeing record new cases as well as record hospitalisations. Countries like Germany, Portugal, South Korea and others are seeing rising numbers again after restrictions were lifted.

What happens if things get worse again?

The OECD has warned that GDP will fall by 6.3% in Australia if there is a return of lockdowns. Thankfully only Victoria is thinking about lockdowns at the moment, most of the other states are free of COVID-19.

The OECD has also made a prediction that the OECD unemployment rate will reach 10% with little recovery of jobs in 2021 if there’s a second save of global infections. World GDP will drop 7.6% in 2020 if that happens. If there isn’t a second wave, unemployment will only reach 9.2% and GDP will drop 6% this year.

There are two clear potential scenarios. To me, it seems like investors are investing as though there aren’t going to be any other major COVID-19 disruptions this year. There are still huge outbreaks going on in places like Brazil and India. These two countries alone are meaningful contributors to the global economy.

Why I think the share market is acting like February 2020

For some reason it took the market a while to realise how much damage COVID-19 was going to do to the global economy and to confidence. Don’t get me wrong, areas of the world like Vietnam, New Zealand, Taiwan and most of Australia are now in a robust position. Borders are closed and citizens largely know how to act to avoid spreading the virus.

But I wouldn’t bet on the US implementing another widespread lockdown again despite the resurgent infection numbers. Who knows what will happen with the share market if COVID-19 is still prevalent around the time of the election?

What I think this means for shares

Just like in February 2020, I don’t think investors are fully taking into account how infectious or damaging COVID-19 is.

I think are some shares that have justifiably performed well over the past three months. Pushpay Holdings Ltd (ASX: PPH), A2 Milk Company Ltd (ASX: A2M), Bubs Australia Ltd (ASX: BUB), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), Ansell Limited (ASX: ANN) are some of the names I’d be happy to buy if the share market sold off again because I don’t believe their earnings would fall (much).

However, there are other businesses which I think would be at risk of a share price decline because investors may be too optimistic about the situation. And governments may not throw more money at citizens again. 

But don’t become too bearish. No-one knows what the share market will do next, so it’s best not to spend too much time trying to predict things. Investing is a long-term endeavour, it’s not just about what happens in 2020. I plan to keep investing every month into the best opportunities that I can see because of the long-term growth potential. Don’t forget that healthcare teams around the world are trying to find treatments and develop vaccines. A healthcare breakthrough could be very beneficial to people’s risk appetite. 

Some of the shares that could be a good idea to protect against another market fall are MFF Capital Investments Ltd (ASX: MFF) due to its large cash position and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) for its defensive investments.

More reading

• 3 ASX shares I’d buy if the market crashes again
• This top fund manager believes dividend yields are going to 0%. Where should you invest?
• Can the Newcrest share price crest to new highs?
• Here’s why I think the Link share price has a huge growth opportunity ahead
• The CBA share price is down 13% this year. Is it a cheap buy?

Motley Fool contributor Tristan Harrison owns shares of Magellan Flagship Fund Ltd and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO, PUSHPAY FPO NZX, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Ansell Ltd. 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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In a media release today, Allan Gray Chief Investment Officer, Simon Mawhinney made a prediction for ASX share dividend yields.

He said the yields for the majority of ASX listed companies could soon be zero or near zero. According to the release, “Allan Gray is progressing on the basis that dividend yields will be close to zero in the near future for the majority of ASX-listed companies.”

The fund manager also stated that APRA had written to banks and insurers in April requesting a reduction in dividends.

This has likely contributed to the dividend cuts from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC),  Australia and New Zealand Banking GrpLtd (ASX: ANZ) and National Australia Bank Ltd. (ASX; NAB). CommBank, Westpac and ANZ have suspended their dividends entirely while NAB has cut its dividend significantly.

The diamonds in the rough

However, not all news regarding ASX share prospects was negative in the release. The fund manager pointed out that some companies have benefited from the wave of events brought on by the coronavirus and were in a position to lift their dividends. The examples provided included Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL). These staples have benefited from both panic buying and the coronavirus shutdowns. 

Additionally, the fund manager pointed out there is a significant gap between defensive shares cyclical shares. For instance, healthcare and utilities versus materials and banks. According to the release, the April market rally saw defensive companies that had performed well prior to COVID-19 favoured against cyclical companies. If the announcement is correct, this disparity will not continue.

Mr Mahwinney said:

“This divergence can’t continue indefinitely and it is important not to forget what might already be priced into cyclical company share prices. Everything has a price and a momentum shift into cyclically-depressed shares seems well overdue”.

An example of a defensive company fitting this description is Ansell Limited (ASX: ANN). Ansell rallied close to pre-coronavirus prices in April and has since reached new record highs. 

If the fund manager is correct, cyclical companies that may rally include BHP Group Ltd (ASX: BHP), Woodside Petroleum Limited (ASX: WPL) and Bank of Queensland Limited (ASX: BOQ). Each are now trading at significantly lower share prices than sold for prior to the coronavirus pandemic.  

The opportunities

The release also spoke to ASX share opportunities, “Despite earnings and dividend headwinds, we believe investors with a firm focus on the fundamentals and the long term will benefit from mispricing opportunities currently in the market.

“These opportunities are in those companies that typically have strong balance sheets and excellent asset bases, but which can be bought at extremely depressed prices given earnings headwinds”.

One example of a company that may meet Simon Mawhinney ‘s dividend opportunity suggestion is Treasury Wine Estates Ltd (ASX: TWE). Treasury Wine has a strong balance sheet and an excellent asset base of high-quality brands. Currently, the Treasury Wine share price is significantly depressed and it is down 44% from its 52-week high of $19.47. While Treasury earnings could face headwinds from the coronavirus, we can likely see its yield recover in the long term.

More reading

• The CBA share price is down 13% this year. Is it a cheap buy?
• Top brokers name 3 ASX 200 shares to buy today
• Is the Woolworths share price a secret buy?
• My 3 high-yield ASX dividend shares to buy now
• Coronavirus second wave potential could drive investment portfolio changes

Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia has recommended Ansell Ltd. 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.

The post This top fund manager believes dividend yields are going to 0%. Where should you invest? appeared first on Motley Fool Australia.

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