Author: therawinformant

The TechnologyOne Ltd (ASX: TNE) share price has started the week on a very disappointing note.

The enterprise software company’s shares dropped as much as 8% at one stage before ending the day down 6.8% at $8.15.

Why did the TechnologyOne share price crash lower?

Investors were selling TechnologyOne’s shares on Monday after it became the subject of short attack by Hong Kong based research firm GMT Research.

GMT Research has previously released scathing reports on engineering company Cimic Group Ltd (ASX: CIM) and logistics solutions company WiseTech Global Ltd (ASX: WTC).

According to the AFR, GMT Research claims TechnologyOne used accounting tricks to pull forward revenue and profits. This resulted in the company “artificially creating growth and hiding a major slowdown.”

The company’s analyst, Nigel Stevenson, has suggested that its FY 2019’s net profit before tax of $76.4 million was inflated by more than 200%. It also believes that revenue growth was actually flat in FY 2018 and then up just 1% in FY 2019.

TechnologyOne’s response.

This morning the company admitted that it had met with GMT Research, but that it only spent 30 minutes with its team. It also stressed that it was not contacted about the allegations prior to publishing.

It said: “GMT Research spent only 30 minutes with us, so we are very surprised with their limited knowledge that they would have published a report in the first place, and more importantly without verifying the accuracy of the report with us. TechnologyOne was at no time shown the report.”

Management also confirmed that “the claims made in the AFR by GMT Research are false and misleading.”

Adding: “TechnologyOne unreservedly stands 100% behind our Audited Accounts as being a true and accurate reflection of our business over the last 21 years.” The company advised that it will now refer the matter to ASIC.

It concluded by confirming that it remains on track to achieve its guidance in FY 2020. That guidance is for net profit before tax growth of 8% to 12% year on year.

More reading

• The rise and rise of ASX SaaS shares
• ASX 200 jumps 0.8%: Big four banks storm higher, TechnologyOne sinks
• Why Domain, OceanaGold, Praemium, & TechnologyOne are tumbling lower
• 5 things to watch on the ASX 200 on Monday
• 3 ASX tech shares to buy and hold

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of WiseTech Global. 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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Don’t let the recent share market rally fool you in thinking that the COVID-19 blues are fading. If anything, ASX banks are on the cusp of a consecutive multi-year bad debt hit to earnings and dividends.

The warning comes from fund manager Janus Henderson who told the Australian Financial Review that banks will be forced to shore up their capital buffers by cutting capital management programs and dividends.

ASX banks’ dividend threat

This isn’t what ASX bank investors want to hear, especially when investors are looking forward to Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) resume dividend payments.

Both banks suspended the payout at the recent half year profit reporting season, while National Australia Bank (ASX: NAB) slashed its interim dividend by nearly two-thirds.

Investors are nervously watching Commonwealth Bank of Australia (ASX: CBA), which will show its dividend hand next month when it turns in its full year report card. CBA’s financial year end is different from the other three big banks.

Is CBA next to cut dividends?

Experts are divided on what CBA will do. Some believe it will take the conservative approach and defer its dividend decision till November to get a better idea of the earnings impact from coronavirus.

Others are more bullish and believe the worst of the economic impact from the pandemic is behind us and CBA will only cut its dividend by a relatively modest amount. This bullish outcome will likely fire-up the CBA share price.

I was in the more bullish camp, but that was before Victoria was forced into a second lock-down. Now there’re fears that New South Wales may follow suit with community transmission of the virus at Star Entertainment Group Ltd (ASX: SGR) and the Crossroad Hotel.

Start of the bad debt downgrade cycle

“We think that banks will continue to need to shore up capital,” the AFR quoted Janus Henderson’s head of Australian fixed interest, Jay Sivapalan, as saying.

“They will go through a multi-year reporting period and cycle of reporting a higher level of provisioning.”

The provisioning for bad debt will need to rise as the chance of loan delinquencies rise. Around 800,000 mortgagees and small businesses have asked Australian banks for a repayment holiday.

These borrowers are struggling to service their loans due to widespread job losses and a drop in consumer spending from the COVID-19 fallout.

Foolish takeaway

However, the situation on the ground may not be as dire as the number suggests. Many mortgagees have suspended loan repayments as a precaution even though they aren’t impacted by the COVID-19 shutdown.

These customers are starting to commence paying their loans again and I think the circa $6 billion in provisioning set aside by the big four may about enough to see them through.

However, this assumes that the current lockdown in Victoria isn’t as damaging as the first and the rest of Australia continues to stay relatively coronavirus free.

But I will admit, this assumption is starting to look a tat optimistic right now.

More reading

• Why the Domino’s share price gained 30% in the first half of 2020
• Where to invest $10,000 into ASX 200 shares right now
• Will the ASX share price climb higher this year?
• Why the Fortescue share price rallied over 40% to a record high in 2020
• Is the CBA share price a buy?

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. 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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The Domino’s Pizza Enterprises Ltd (ASX: DMP) share price has been a particularly positive performer in 2020.

During the first half of 2020, the pizza chain operator’s shares rose by an impressive 30%.

This compares to a decline of ~12% for the S&P/ASX 200 Index (ASX: XJO) over the same period.

Since then the Domino’s share price has continued to rise and even hit a record high of $75.00 last week.

Why is the Domino’s share price on fire in 2020?

Investors have been buying the company’s shares in 2020 after it continued to deliver solid sales growth from the majority of its businesses during the pandemic.

In its update at the end of April, Domino’s revealed that its operations in Japan and Germany have continued their strong sales performance since the end of the first half. Sales in Japan were particularly strong according to management.

And in Australia and Europe (excluding France), its same store sales have been positive during the second half. The company’s French stores were closed for a period during the pandemic, as were its New Zealand stores.

All in all, combined with its strong first half performance, this appears to have positioned Domino’s to be one of the few companies on the ASX 200 that will deliver a solid full year result in August.

Positive long term outlook.

In addition to its near term performance, investors have also been buying Domino’s due to its positive long term outlook.

Management has reiterated its plan to target new store openings of 7% to 9% per annum and same stores sales growth of 3% to 6% per year over the next five years.

If it delivers on these targets, it should underpin solid earnings growth over the period and could drive the Domino’s share price notably higher.

It is for this reason, that I would still be a buyer of its shares even after its strong gains in 2020.

More reading

• Fund manager warns that ASX bank dividends facing multi-year bad debt hit
• Where to invest $10,000 into ASX 200 shares right now
• Will the ASX share price climb higher this year?
• Why the Fortescue share price rallied over 40% to a record high in 2020
• Oil Search share price drops on impairment hit of up to US$400 million

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Domino’s Pizza Enterprises 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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I think it’s getting harder to invest in shares right now.

Many ASX shares have performed very strongly ever since the market bottomed on 23 March 2020.

Look at some of the strongest performing ASX shares. The Afterpay Ltd (ASX: APT) share price has gone above $70. The Appen Ltd (ASX: APX) share price is above $35. The Xero Limited (ASX: XRO) share price is above $90.

Those three names I mentioned are three of the ASX’s most promising businesses. They’re growing internationally very strongly. Those three are above where they were just before COVID-19 impacted the share market.

Shares like Wesfarmers Ltd (ASX: WES) and APA Group (ASX: APA) have recovered from the selloff and are now almost back to previous levels.

I think the recovery is largely justified for plenty of shares. Many shares have reported that customer activity is the same, if not higher, than pre-COVID levels. Add in the incredibly low official interest rates – valuations should be higher due to that.

Shares such as Adairs Ltd (ASX: ADH), Nick Scali Limited (ASX: NCK), JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) are reporting higher sales. Perhaps that can be put down to all of the government stimulus, but their revenue is going up nonetheless. I would have expected revenue to fall for those types of consumer discretionary businesses during a pandemic and a recession. If a business is doing better than expected then its share price should rise. 

How do you invest during this environment?

During the time of the COVID-19 share market selloff in March I was encouraging investors to try to pick up bargains. Some ASX shares like Pro Medicus Limited (ASX: PME) looked as though they had been too heavily sold off.

As the market recovered I also pointed out shares like Pushpay Holdings Ltd (ASX: PPH) which seemed unfairly sold off and the terrible circumstances may in-fact accelerate Pushpay’s growth. Pushpay has rocketed since then, so I’m not sure that it’s an obvious buy anymore, though I still believe it has a great long-term future. These types of accelerated-growth opportunities are disappearing as the market bids them up. 

For the rest of the share market, there is still so much uncertainty.

How much is the unemployment rate and consumer spending being supported by the jobkeeper program? Jobkeeper is due to finish in less than three months. Jobkeeper can’t go on forever, but there are worries that the country faces a financial cliff.

How much will the new Victorian COVID-19 outbreak setback the overall economic national picture?

Is the NSW outbreak on the verge of turning into something like Victoria’s in a couple of weeks?

Will the US’ massive infection numbers start overwhelming certain areas of the country like how New York was overwhelmed a few months ago?

It’s important to recognise that there is always going to be uncertainty with the share market. There has always been something to worry about over the past decade. Greece, ISIS, Brexit, the trade war and so on. That’s why you have to think long-term with shares. Sometimes investors have to climb a ‘wall of worry’.

You don’t have to invest right away

We live in a world of instant news, instant reactions – an information overload. You may feel like you need to do something with your portfolio in July. But you don’t have to. No-one is forcing you to push the ‘buy’ button on shares. You can be patient.

Warren Buffett has a great quote – he has a quote for everything, right? – saying that you don’t have to swing at every pitch:

“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”

Your 30-year returns aren’t going to be massively impacted whether you decided to invest in July 2020 or November 2020. I think there are going to be more opportunities later this year, particularly when the US election comes around.

I will keep investing each month if I see long-term opportunities, such as Bubs Australia Ltd (ASX: BUB). If you see a good opportunity, go for it. But I’m now saving some investing cash for later in the year.

More reading

• 3 ASX shares with incredible cost moats
• These ASX dividend shares will help you beat low interest rates
• ASX shares tapping into the US market
• The rise and rise of ASX SaaS shares
• The Wesfarmers share price gets support from spin-off rumours

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of PUSHPAY FPO NZX and Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO, APA Group, Appen Ltd, and Wesfarmers Limited. The Motley Fool Australia has recommended PUSHPAY FPO NZX. 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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With many savings accounts offering base rates of just 0.05% per annum, if I had $10,000 in an account I would consider putting it to work in the share market.

After all, if you invest wisely, you could generate a return many, many times greater with shares.

But where should you invest $10,000 right now? Two top ASX 200 shares to consider buying are listed below:

a2 Milk Company Ltd (ASX: A2M)

I think a2 Milk could be a great place to invest $10,000. The infant formula and fresh milk company has been an impressive performer in FY 2020 despite the pandemic. In April, the company revealed that demand for its products had been very strong, particularly in respect of infant nutrition products. So much so, the company expects revenue in the range of NZ$1,700 million to NZ$1,750 million in FY 2020. It also forecast stronger than expected EBITDA margins of 31% to 32%, despite investing NZ$200 million into marketing activities.

The top end of its guidance range implies year on year revenue growth of 34.1% and EBITDA growth of 35.4%. The good news is that based on its relatively modest market share and increasingly popular products, I believe there is still a long runway for growth in the China market. This is likely to be complemented by the launch of new products or even acquisitions in the near future. As a result, I think the a2 Milk share price has the potential to continue its market-beating ways for a long time to come.

CSL Limited (ASX: CSL)

With the CSL share price down 18% from its 52-week high, I think now could be an opportune time to invest in this biotherapeutics giant. This share price weakness has been caused by concerns over the impact that the pandemic will have on plasma collections. These collections are vital for the production of some key products and lower levels could weigh on its performance a little in FY 2021.

While this is certainly a risk, I believe other areas of the business will offset this. Particularly its Seqirus business, which looks set to benefit greatly from increasing demand for flu shots. Looking further ahead, I believe its burgeoning research and development (R&D) pipeline will be very supportive of growth. This pipeline contains a number of therapies that have the potential to generate billions of dollars in sales over the next decade if their trials are successful.

More reading

• Will the ASX share price climb higher this year?
• Why the Fortescue share price rallied over 40% to a record high in 2020
• a2 Milk and 1 other quality ASX share to buy right now
• Oil Search share price drops on impairment hit of up to US$400 million
• The Wesfarmers share price gets support from spin-off rumours

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 CSL Ltd. The Motley Fool Australia owns shares of A2 Milk. 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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The COVID-19 pandemic has not been kind to retailers. Concerns over the potential economic impacts of the virus have caused consumer spending to drop, while social distancing restrictions have made it difficult for shops to generate the amount of foot traffic required to stay profitable.

Traditional brick-and-mortar retailers have suffered the most from government-imposed lockdowns. Department store operator Myer Holdings Ltd (ASX: MYR) has seen its share price plunge over 50% so far this year – and that’s despite rallying more than 150% higher since late-March.

Kathmandu Holdings Ltd (ASX: KMD), which specialises in clothing and equipment designed for travel, hiking and outdoor adventure activities has also struggled during COVID-19. Its business has suffered due to both the social distancing and travel restrictions put in place by governments to fight the spread of coronavirus. The Kathmandu share price has also plummeted 50% lower so far this year.

However, there are at least 2 ASX retail shares that have so far managed to buck the trend.

Kogan.com Ltd (ASX: KGN)

Australia’s answer to Amazon, online retailer Kogan has emerged as one of the market darlings of the new coronavirus economy. The company has benefitted from surging rates of online shopping due to people spending more time confined to their homes. This has been reflected in its share price, which has skyrocketed more than 130% higher this year.

According to its most recent business update, released to the market on 5 June, gross sales for the fourth quarter to date (April and May) doubled that of the same period last year. Gross profit was up 100% and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) had tripled.

With online retailing gathering momentum and retailers like Myer in decline, Kogan decided it was the perfect time to strengthen its war chest through a $100 million institutional placement and $20 million share purchase plan, both of which recently closed oversubscribed.

Temple & Webster Group Ltd (ASX: TPW)

Another company to benefit from people spending more time at home is online furniture and homewares retailer Temple & Webster. In its June business update, covering the period up to the end of May, Temple & Webster reported year-to-date revenue of $151.7 million, an increase of 68% over the same period last year. And year-to-date EBITDA had surged an incredible 668% higher to $7.1 million.

Investors have flocked to Temple & Webster. Its share price has surged 172% higher already this year, which is pretty astounding given the gloomy economic outlook. However, the success of both Temple & Webster and Kogan sends the strong signal that the market believes that a post-coronavirus economy will still be heavily reliant on ecommerce.

Digital retailers aren’t burdened by the significant staffing and rental costs from a brick-and-mortar retail network, meaning they can compete more effectively on price. Additionally, they have shown their ability to quickly pivot to meet changing customer demands.

Like Kogan, Temple & Webster has seized on this opportunity to strengthen its war chest. Earlier this month it announced the successful completion of a $40 million institutional private placement.

With growing customer numbers and plenty of cash in the bank, these 2 ASX retail shares look like formidable forces as the COVID-19 pandemic continues to reshape the retail landscape.

More reading

• Here are the 10 most shorted shares on the ASX
• Where I would invest $5,000 into ASX shares in July
• 2 exciting ASX tech shares with enormous potential
• Why Kogan, Netwealth, Silver Lake, & Zip Co shares are storming higher
• A surprise ASX share that’s doubled since March

Rhys Brock owns shares of Kogan.com ltd and Temple & Webster Group Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd and Temple & Webster Group Ltd. The Motley Fool Australia has recommended Kogan.com ltd and Temple & Webster Group 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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The ASX Ltd (ASX: ASX) share price has increased 7.1% in 2020, but will the share market operator’s value continue climbing higher this year?

What does ASX Ltd actually do?

ASX Group, the organisation’s holding company, was formed in July 2006. It was borne out of a merger between the Australian Stock Exchange and the Sydney Futures Exchange.

The ASX functions as ‘a market operator, clearinghouse and payments system facilitator’. That basically means it manages capital flows, trading and securities settlements across cash, fixed income, derivatives and equities.

The ASX Ltd share price has been climbing higher in 2020 and is outperforming the S&P/ASX 200 Index (ASX: XJO) by some margin. So, what’s driving the ASX share price in 2020?

Will the ASX share price continue climbing higher this year?

This one is really a 50-50 in my books. Market volatility like we’ve seen in the March bear market can be a good or bad thing for share market operators.

That’s why the ASX Ltd’s August earnings will be so critical to watch. If the company reports strong trading revenue, that could offset lower initial public offering (IPO) earnings.

ASX Ltd is currently a big outperformer, but I really think the level of market volatility, and how this is ultimately reflected in the company’s bottom line, is the key here.

How does ASX Ltd make money?

The share market operator generates income in a few different ways. One major contributor is fees received for IPOs. The company’s Listings and Issuer Services segment generated half-year revenue of $114.6 million. Other major contributors were Derivatives and OTC Markets ($160.0 million) and Trading Services ($126.1 million).

While IPOs are less likely to occur in a volatile market like we’re experiencing right now, other areas of the business may pick up. That includes more exchange-traded product listings with ASX Ltd’s revenue for this segment climbing 16.4% to $4.3 million in 1H20.

Higher earnings potential would obviously be good news for the ASX Ltd share price. On that note, we’ve seen a big increase in trading volumes this year. Increasing numbers of investors have been looking to buy and sell which means more transactions being processed by the ASX.

That’s why I think the company’s earnings result is a critical factor for the ASX share price going forward. I would expect IPO revenue to fall but who knows how good the result could be for the company’s Trading Services and Derivatives businesses.

Are there any major competitors?

The ASX attracts some intense competition from offshore exchanges like the London Stock Exchange, NASDAQ, NYSE and Euronext.

Of course, ASX Ltd wants to keep more companies in Australia. That means losing top Aussie companies like Atlassian Corporation Plc (NASDAQ: TEAM) to offshore markets  is bad for business.

In Australia, ASX Ltd basically enjoys a monopoly. Its major rival is NSX Ltd (ASX: NSX) which is trying to develop a blockchain-based market.

However, the NSX has a market capitalisation of just $23.3 million. With ASX Ltd boasting a share price of $83.98 and a $16.3 billion market cap, this puts it well ahead of its smaller rival.

More reading

• Where to invest $10,000 into ASX 200 shares right now
• Why the Fortescue share price rallied over 40% to a record high in 2020
• Oil Search share price drops on impairment hit of up to US$400 million
• The Wesfarmers share price gets support from spin-off rumours
• ASX 200 jumps 0.8%: Big four banks storm higher, TechnologyOne sinks

Motley Fool contributor Ken Hall 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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The Fortescue Metals Group Limited (ASX: FMG) share price hit a high a record high this afternoon and is among the top performers on the S&P/ASX 200 Index (Index:^AXJO) this year.

Shares in the iron ore miner jumped 2.6% to $15.24 in after lunch trade, which takes its gains for 2020 to 42%.

In contrast, the BHP Group Ltd (ASX: BHP) share price and the Rio Tinto Limited (ASX: RIO) share price shed 7% and 2%, respectively, over the period.

Good reporting season ahead

There are a few reasons for Fortescue’s outperformance. Firstly, the miner is tipped to be one of the August reporting season heroes.

There isn’t much risk of the miner disappointing on the profit front when the iron ore price remains stubbornly strong right through the COVID-19 market meltdown.

Further, the outlook for the commodity looks reasonably bright even as the global economy is hit by the proverbial coronavirus-recession bus.

Brazil’s inability to control the rampant outbreak means rival Vale SA’s iron ore production levels will stay depressed over the short- if not medium-term.

Fortescue’s temporary edge over BHP and RIO

What’s good for the goose is normally great for the gander too. This means BHP’ and Rio’s earnings should benefit from the same thematic.

The issue for BHP is that it’s diversified income stream, which is normally seen as a plus in managing single-commodity risk, is hurting sentiment. The group is exposed to oil production and the outlook for crude isn’t great.

Investors are also keener to support Fortescue over Rio Tinto because the former is more leveraged to buoyant iron ore prices. Fortescue’s production costs are higher than Rio Tinto and its ore is generally of lower quality.

When it pays to be the second fiddle

Given that profit margins of Chinese steel mills are reasonably high and there’s little chatter about the Chinese government imposing strict environmental pollution controls, these customers won’t mind buying the lower quality ore.

Historically, companies at the lower end of the quality scale tend to outperform when things are going well but underperform when the outlook turns.

ASX dividend outlook

Another reason why Fortescue is proving to be so popular is its dividend. There’s a big recent step-change in dividends from Fortescue, and even with the share price rally, I think the stock can generate an FY20 dividend yield of around 10%.

That’s more generous than BHP or Rio Tinto, even though their yields will put many others to shame.

The only thing is that Fortescue’s dividend payment is expected to peak in FY20 before turning lower in the next two years.

Despite this, I think the stock will continue to be well supported until steel margins come under pressure or when Vale returns to full production.

More reading

• 3 ASX shares with incredible cost moats
• Oil Search share price drops on impairment hit of up to US$400 million
• The Wesfarmers share price gets support from spin-off rumours
• ASX 200 jumps 0.8%: Big four banks storm higher, TechnologyOne sinks
• How does the Fortescue share price compare to its peers?

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd.  Connect with me on Twitter @brenlau.

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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Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy? The big ASX bank continues to grind higher after the initial COVID-19 share market selloff.

The CBA share price is still down 20% from the pre-COVID-19 peak in February 2020. But since 23 March 2020 it has actually risen by 33%. Not a bad return from one of Australia’s biggest businesses.

The recovery

I can see why the CBA share price has gone up so much over the past few years. Not only is Australia in a much better COVID-19 situation than most other countries, but the economic outlook looks a lot better than it did a few months.

Remember when it turned out that jobkeeper had been overestimated by tens of billions of dollars? 

A better COVID-19 situation makes for a stronger economy, which in turn benefits CBA.

The big ASX bank is leveraged to the strength, or weakness, of the economy. CBA lends to thousands of households and business across the country. If difficulties pop up then CBA’s loan book will feel it.

Will CBA and its share price face more pain?

It’s very hard to predict how the economy and share price will perform over the next couple of months. You can only make an educated guess. Share prices of companies should follow earnings over the longer-term. CBA has already warned that its FY20 profit faces a hit from increased credit provisions from potential COVID-19 impacts. Investors were expecting that, it’s why the share price fell in February and March. 

In the quarterly update to 31 March 2020 the bank said that it was adding a loan loss provision of $1.5 billion for COVID-19. That’s a big number, but in terms of its total loan book it was still a low number. At 31 March 2020, the ratio of home loan consumer arrears of more than 90 days was 0.63%, which was lower than the ratio at both March 2019 and March 2018.

The CBA share price could come under more pressure due to the ongoing Victorian lockdowns and perhaps if the NSW outbreak starts spreading out of control.

The net interest margin problem

A key measure of profitability for the banks is the net interest margin (NIM). It measures the difference between the cost of funding and the interest rate it charges its borrowers. The RBA, just like other central banks, has reduced the official interest rate. The Australian rate is now at a record low of just 0.25%.

CBA isn’t going to charge customers for holding cash in their transaction and other accounts, so each reduction of the interest rates lowers CBA’s NIM and makes it harder to maintain profit. This could therefore hinder the CBA share price.

How long will the CBA NIM be under pressure? RBA governor Phil Lowe said that interest rates will be low for years, though the rate is unlikely to go negative.

Is it a good time to buy shares?

I think CBA is a higher quality bank than the other ASX banks of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Group (ASX: ANZ). It has a stronger balance sheet and it’s less exposed to business loans. Households have received a large amount of support during the global pandemic so far.

CBA shares are still cheaper than it was prior to COVID-19 exploding. I don’t know how much dividends it’s going to pay over the next 12 months. Using the trailing payments, it has a grossed-up dividend yield of 8.5%. But the upcoming dividends could be halved, or more, in the next two results so I wouldn’t buy CBA for short-term dividends right now.

Today’s CBA share price doesn’t seem cheap compared to most of the first half of FY20. I would wait for a better share price before buying CBA shares. There could be another selloff later this year and it doesn’t seem like great value to me right now with the potential negative outcomes for the economy. 

More reading

• Where will the Macquarie share price close the year?
• ASX 200 Weekly Wrap: Rocketing BNPL shares fail to stop ASX 200 slide
• How I’d build a $100,000 share portfolio with ASX ETFs
• 3 ASX shares I won’t hesitate to buy in the next market crash
• ANZ said there will be another wave of Victorian businesses collapsing

Motley Fool contributor Tristan Harrison 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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One of the best investing books I think you can read is Pat Dorsey’s ‘The Little Book That Builds Wealth’. The book is an excellent guide to identifying businesses with robust economic moats or competitive advantages.

One important moat described in Dorsey’s book is the moat of cost advantages, or cost moats. This refers to companies that can produce goods or services more cheaply than the competition, enabling them to win more customers and earn higher returns for shareholders. Cost moats are especially important in retail and commodity industries where price is a large part of a purchase decision.

Wesfarmers leads the pack on low-cost retail

The group of businesses that make up Wesfarmers Ltd (ASX: WES) exemplify the low cost advantage. The Wesfarmers retail arm includes large scale hardware chain Bunnings and big retail stores Kmart and Target. But in this example, let’s just look at Bunnings, which has huge purchasing power supported by its more than 370 stores (as at 31 December 2019).

Bunnings’ low cost model means that the business only reported an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 12.6%, in the 2019 financial year. However, Bunnings’ sheer volume of sales turned that 12.6% margin into a monster return on invested capital (ROIC) of 50.1%!

Low-cost commodity kings

Cost advantages are essential for commodity producers because one product is interchangeable with the other. Price is the only difference to the customer, so being able to offer the lowest price is key to survival.

Fortunately, many ASX miners are able to operate at extremely low costs because of the enormous scale they operate on. Dividing overhead costs and exploration costs by vast quantities of gold, copper or iron helps Newcrest Mining Limited (ASX: NCM), BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) keep costs per unit down and maximise their returns.

Another example is LNG producer Woodside Petroleum Limited (ASX: WPL). Woodside’s large scale projects, like Pluto LNG, and access to energy rich basins helps the company to keep production costs per unit especially low.

In the 2019 financial year, Woodside Petroleum’s production cost per unit was just US$5.70 per barrel of oil equivalent (boe). Fellow energy producer Santos Ltd (ASX: STO) by comparison reported a unit production cost of US$7.24 per boe.

Foolish takeaway

Cost-based moats are incredibly valuable for retail companies and commodity producers that sell products that have no differentiation. If a company like Wesfarmers can sustain its low-cost advantage over the long term, it could make a highly prized addition to your investing portfolio.

More reading

• Why the Fortescue share price rallied over 40% to a record high in 2020
• These ASX dividend shares will help you beat low interest rates
• The rise and rise of ASX SaaS shares
• The Wesfarmers share price gets support from spin-off rumours
• How does the Fortescue share price compare to its peers?

Motley Fool contributor Regan Pearson has no position in any of the stocks mentioned.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia owns shares of Wesfarmers 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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