Author: therawinformant

If you’re interested in adding some new ASX shares to your portfolio, then the three listed below could be worth considering next week.

I believe they could be among the best shares on the ASX and destined to be strong performers over the next few years. Here’s why I would invest $10,000 into them when the market reopens:

Appen Ltd (ASX: APX)

I believe that Appen could be one of the best shares on the ASX. It provides or improves the data that is used for the development of machine learning and artificial intelligence products. Given how important these products are becoming for businesses, you won’t be surprised to learn that demand for its services has been growing rapidly. I’m confident this demand will remain strong for many years to come and underpin above-average earnings growth over the 2020s.

Pushpay Holdings Ltd (ASX: PPH)

Another ASX share to consider buying is this donor management system provider. The number of churches using Pushpay’s platform has been increasing at a strong rate over the last few years and has driven stellar revenue growth. In FY 2020, for example, Pushpay reported a 42% increase in customer numbers to 10,896. Pleasingly, this is just scratching the surface of its huge opportunity in a niche but lucrative market. Demand for its platform has been particularly strong this year and recently led to management upgrading its guidance for FY 2021. It now expects earnings before interest, tax, depreciation and amortisation (EBITDA) of US$50 million to US$54 million, up from its previous guidance of US$48 million to US$53 million. This will be double FY 2020’s earnings.

Xero Limited (ASX: XRO)

A third ASX share to look at buying is Xero. It is a cloud accounting software company which has been a very strong performer over the last few years. This positive form continued in FY 2020 when Xero once again delivered impressive top line growth of 30% year on year. And due to its increasing margins thanks to the benefits of operating leverage, its EBITDA grew 52% to NZ$139.2 million. I’m confident Xero still has a long runway for growth thanks to its massive global market opportunity and its high quality and sticky product.

More reading

• What is the price/earnings (p/e) ratio?
• How to become a millionaire in 25 years with $20 a day
• These were the best performers on the ASX 200 last week
• ASX 200 up 0.9%: Big four banks rebound, Appen hits record high
• ASX tech shares: 2 exciting small caps to watch closely

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 Xero. The Motley Fool Australia owns shares of and has recommended PUSHPAY FPO NZX. 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.

The post Where to invest $10,000 into ASX shares next week appeared first on Motley Fool Australia.

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Time to switch to gold?

With the S&P/ASX 200 Index (ASX: XJO) in full recovery mode, you would think that investors everywhere are basking in the gains that both ASX shares and share markets around the world have given investors over the past 3 months. After all, the ASX 200 is up more than 30% since its 23 March low.

But according to reporting in the Australian Financial Review (AFR), the world’s richest investors are not coming to the party. Instead of barrelling back into shares, the world’s ultra-rich are instead turning to the oldest of investments – gold.

According to the AFR report, advisers to the world’s ultra-rich are recommending as much as a 10% allocation to gold, which is far above the token amounts that were apparently being recommended before the COVID-19 pandemic.

This is despite gold prices rising more than 14% since the start of the year. One troy ounce of gold will set you back around US$1,723 today – or $2,520 in our dollars.

So why are the ultra-rich ignoring shares in favour of gold?

Well, it’s out of fear in my view. Fear of a second wave of coronavirus infections, fear of loose monetary policy, fear of asset bubbles and fear of inflation.

See, shares (despite their many benefits) are not an ultra-safe place to store your wealth if capital preservation is a priority, as we saw in March. And right now, there are growing signs that the unprecedented amount of government intervention in the markets (in particular the US) is driving the rally in shares prices we have been witnessing of late.

What happens if (or when) the US government starts tapering off quantitative easing and bond-buying? Or what happens if it never does? I think these are the questions that the ultra-rich are asking themselves right now. And the logical conclusion for a worst-case scenario is using gold.

Should we all copy the ultra-rich and buy gold?

I do think it can be advantageous to emulate and take lessons from wealthy investors. But I also think that the priorities of the ultra-rich and the everyday investor are disparate. The ultra-wealthy (in my opinion) are typically more concerned about the preservation of wealth rather than building wealth. In this context, I think using gold makes sense.

But I don’t think it makes sense for us Foolish investors who are trying to build long-term wealth with shares. Even though ASX shares are volatile, history shows us that they remain the best asset class for building wealth over long periods of time. We can’t really say the same about gold in my view.

So instead of selling all of your shares and buying up bullion, I think most investors will be better off just sticking to a long-term portfolio of quality ASX shares.

More reading

• 2 blue chip ASX 200 dividend shares to buy next week
• These were the best performers on the ASX 200 last week
• Short-sellers are stepping up their attack against these popular ASX shares
• ASX 200 up again, ASX retailers make big gains
• These 3 ASX ETFs are yet to recover from the market crash

Motley Fool contributor Sebastian Bowen 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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To say we live in uncertain times is possibly the greatest understatement of the year so far. The market is rocking back and forth from peaks to troughs in response to rapidly-changing world events. If the share market were to drop again by, say, 10% then I would be looking at these shares to buy for my portfolio.

Second chance value shares

For me, a value share is a good company that is underappreciated by the investing community. Moreover, when crashes happen good companies often get trampled in the rush for the exits. In March there were dozens of good companies selling at great prices. 

Fortescue Metals Group Limited (ASX: FMG) is one of the shares I bought heavily during the ASX trough. I think it is undervalued even today. However, if I can get it cheaper I will try to do that. I am happy to wait to see if it is going to dip again before the economy starts to normalise. Fortescue is selling at a reasonable price to earnings ratio (P/E) of around 6.

Another great value ‘buy’ if the market falls would be Wesfarmers Ltd (ASX: WES). I do not own this share at the moment but I would buy in if the price were to fall by a reasonable amount. I like what this company is doing to reduce poor-performing retail outlets. Recent work to release capital and closing down smaller stores took courage. Also, and most importantly, Wesfarmers has an online asset that is a direct competitor to Kogan.com Ltd (ASX: KGN).

Great growth shares to buy

Of course, everyone wants the chance to buy into Afterpay Ltd (ASX: APT) if the share price lowers again. Personally, though, I think this is pretty unlikely. For me, I would be very interested in investing in EML Payments Ltd (ASX: EML) if the price was to lower to a more reasonable level. Currently, it has a P/E of 102 which indicates the market thinks it will earn a lot in the near future. For me, this seems a little high.

Zip Co Ltd (ASX: Z1P) has nearly doubled in the past month. It now has a market capitalisation of $2.39 billion versus the Afterpay market cap of $15 billion. At best this company has to increase its value 6 times, which I do not believe it’s likely to. I would buy into Zip Co if it reduced its market cap by 25 – 50%. Given the tenuous nature of the market and of these new buy now pay later shares, I think that is a possibility.

Foolish takeaway

There is a lot of value on the share market today, and a lot more opportunity if it were to fall again in the near future. One of the keys to investing is to be patient. Another important discipline is to not get worked up if you ‘miss out’ on an opportunity. There will be others, and there is always something you can do to grow your capital. 

More reading

• Consider these blue chip ASX shares for strong dividend yields
• How to turn $20,000 into $250,000 in 10 years with ASX shares
• How to become a millionaire in 25 years with $20 a day
• These were the worst performers on the ASX 200 last week
• Australian retail sales up 16.3% in May

Daryl Mather owns shares of Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited and ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO and Wesfarmers Limited. The Motley Fool Australia has recommended Emerchants 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.

The post Which shares to buy if the ASX tumbles appeared first on Motley Fool Australia.

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If you’re planning to add some dividend shares to your portfolio next week, then the ones listed below could be worth considering.

Here’s why I think they are top options for income investors right now:

BHP Group Ltd (ASX: BHP)

If you don’t mind investing in the mining sector, then you might want to consider buying BHP. I think it is a great dividend option right now due to its generous yield and positive outlook. Thanks to its world class operations and their low costs, I believe BHP is well-positioned to continue generating high levels of free cash flow over the coming years. Especially with iron ore at such strong prices.

And given the strength of its balance sheet, I suspect the majority of its free cash flow will be distributed to shareholders through dividends. In light of this, I estimate that the mining giant’s shares currently provide investors with a fully franked ~5% FY 2021 dividend yield.

National Australia Bank Ltd (ASX: NAB)

Another option for investors to consider buying for dividends is NAB. The banking giant’s shares have fallen heavily this year due to concerns over a potential spike in bad debts because of the pandemic. While I feel a rise in bad debts is inevitable, I’m optimistic the provisions it has made are more than enough to cover the potential damage.

In light of this, I feel the worst is behind the bank and now would be a good time to consider a long term investment in its shares. Especially for income investors in this low interest rate environment. At present, I estimate that NAB’s shares offer a generous fully franked 5.2% FY 2021 dividend yield. This is materially better than the interest rates offered with its term deposits and savings accounts.

More reading

• Consider these blue chip ASX shares for strong dividend yields
• These were the best performers on the ASX 200 last week
• Short-sellers are stepping up their attack against these popular ASX shares
• ASX 200 up again, ASX retailers make big gains
• The ASX big bank stock with the best forecast dividend yield for the new year

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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The price/earnings (p/e) ratio is one of the most commonly used investing metrics.

There are lots of different ways to evaluate shares. You can look at the share price, the market capitalisation, the net profit, the dividend yield, the net tangible assets (NTA), the return on equity (ROE), the (free) cashflow and so on.

Different sized shares make different amounts of profit. How are you supposed to decide whether Commonwealth Bank of Australia (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS) is cheaper?

The price/earnings ratio allows investors to try to compare different businesses based on how expensive they are compared to their earnings, even if they’re from different industries and there are big market capitalisation differences.

How the price/earnings ratio works

The price/earnings ratio will tell you what multiple the current share price is compared to the earnings.

I’ll try to give you an easy example so you can get your head around it. Imagine there’s a café or shop that makes $100,000 of profit a year after paying for all expenses and costs. How much would you buy that business for? Assuming the business is going to be profitable for the foreseeable future, you’d probably pay more than $100,000. If you’d be willing to pay $300,000 then the business would have a price/earnings ratio of 3.

If that shop had lots of growth potential then perhaps you’d be willing to pay $500,000 or maybe even $1 million. That would be a p/e ratio of 5 or 10.

With big ASX shares like Telstra or Macquarie Group Ltd (ASX: COH), you can do the same sort of calculation. For example, in FY20 Macquarie made $7.645 of diluted earnings per share and it currently has a share price of $122, which translates to a price/earnings ratio of 16. This could also be described as 16x FY20’s earnings.

How to compensate for faster-growing businesses

It starts getting tricky when you try to factor in the growth of a business. You could have one business with a FY20 p/e ratio of 20 and another with a FY20 p/e ratio of 30. One looks a lot more expensive than the other on this year’s earnings.

But what if the second business is projected to double its profit in FY21 and the first doesn’t grow profit at all? Compared to FY21’s future earnings, the first business has a forward p/e ratio of 20 and the second has a forward p/e ratio of 15. The second business now looks cheaper.

If a business is growing at a good pace then you need to think about the estimated earnings of future years, not just the current year.

The positives of using the price/earnings ratio

I like how universal the p/e ratio can be. You can use it to compare a $100 billion giant and a small $100 million company.

The price/earnings ratio is easy to calculate. All you need is the share price and the earnings, which is available in the annual report. For future earnings you’ll have to find an earnings projection or do some estimates yourself, which can be tricky.

Investors should focus on (long-term) profitability, so it’s good to look at a metric that compares profitability of different shares.

The negatives

However, the p/e ratio can be simplistic at times in my opinion.

The accounting profit, and therefore the p/e ratio, can give an impression of excessive profitability. Depreciation is one of the worst types of expenses, the money goes out of the door whilst the deduction takes several years to be fully recognised. Some businesses may end up (legitimately) spreading out the cost of depreciation, which boosts near-term profit. There are some businesses that just fully expense things upfront in their accounts – I respect these companies.

Also, with some businesses you may see revenue recognised quite a long time before the cash is actually received into the bank. There are risks with this. It’s important to look at the ongoing cash conversion. Indeed, some investors just prefer to look at the operating cashflow or the free cashflow rather than the accounting profit.

If you just focus on the p/e ratio you may miss cash generative businesses. Some businesses like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have high annual non-cash costs like depreciation. If you focus on just the profit then you may miss how much annual cash they (normally) produce which can be distributed to shareholders.

The price/earnings ratio doesn’t work well for loss-making businesses – there’s no ‘p’ because there isn’t any profit yet. Avoiding loss-making businesses could mean missing out on a lot of future capital gains. Businesses like Pushpay Holdings Ltd (ASX: PPH) just needed to reach a certain scale before they show very attractive levels of profitability.

Foolish takeaway

I think the price/earnings ratio is a useful metric that can be used to quickly look at most businesses. However, there are some situations where it’s not the best metric to use. It’s also important to understand the relationship between the profit and cashflow for each business. I like to use the forward p/e ratio to assess the valuation of growth shares. 

More reading

• Consider these blue chip ASX shares for strong dividend yields
• How to become a millionaire in 25 years with $20 a day
• ASX 200 up again, ASX retailers make big gains
• The ASX big bank stock with the best forecast dividend yield for the new year
• Brokers just upgraded these ASX 200 stocks to “buy” today

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited, PUSHPAY FPO NZX, and Telstra Limited. The Motley Fool Australia owns shares of Transurban Group. 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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S&P/ASX 200 Index (ASX: XJO) shares are a great hunting ground to find good opportunities for your portfolio.

To get into the ASX 200 a business must have already shown a sustained period of growth or stability.

There are some very large ASX shares like Westpac Banking Corp (ASX: WBC) and Telstra Corpoation Ltd (ASX: TLS) which are popular but I don’t think they have a lot of growth potential. They are mature businesses which already command a large market share. 

Instead, I think these ASX 200 shares would be good picks next week for the long-term:

Share 1: InvoCare Limited (ASX: IVC)

The funeral operator has seen its share price decline by 24% since the start of its COVID-19 decline. It’s a morbid idea but I think it has solid return potential.

InvoCare has been affected by COVID-19 this year. There’s no doubt about that. The restrictions on funeral numbers will reduce FY20 earnings. But thankfully Australia has only had a small number of coronavirus deaths compared to many other countries.

This probably means that the actual 2020 death rate will be similar to the projected death rate. Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. This is a powerful long-term tailwind. 

Indeed, there may even be less deaths in 2020 because of impacts like increased personal hygiene. This is a good thing for the country and for families. For InvoCare, it’s a delay of funeral numbers. But not lost entirely.

The ASX 200 share has a solid dividend record. I think good dividends will continue to flow from InvoCare in future years. With InvoCare, I think investors could see solid total returns with a good dividend yield and steady earnings (and hopefully share price) growth. Its capital raising also improved the strength of the balance sheet.

Interest rates are now incredibly low so bond-like businesses such as InvoCare theoretically should be valued higher.

It’s priced at 19x FY22’s estimated earnings.

Share 2: Brickworks Limited (ASX: BKW)

In my opinion, there are few ASX 200 shares that make more sense than Brickworks in book value terms.

Brickworks currently has a market capitalisation of $2.29 billion. Its industry property trust stake is worth $710 million (growing) and its shareholding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) is worth $1.84 billion. Those two divisions have a combined pre-tax value of $2.55 billion.

I like that Brickworks’ dividend is entirely supported by the cash flow paid by those two assets.

However, the rest of the business is also exciting for the long-term. Brickworks recently acquired three brickmakers in the US. That strategy now means that Brickworks is the leading brickmaker in the northeast of the US. America is a huge market and there’s plenty of long-term growth potential for Brickworks, particularly with efficiency gains.

The ASX 200 share is best known for its Australian building product subsidiaries. Bricks, paving, masonry, precast, roofing – it sells a lot of different products.

COVID-19 is probably going to cause the Australian construction sector to have a tough year. But construction is usually cyclical. When immigration returns there is likely to be a bounce back of activity, which would be beneficial for Brickworks. The $25,000 HomeBuilder scheme could also help Brickworks in the shorter-term.

A bonus with Brickworks is that it has one of the best dividend records around. It hasn’t cut its dividend for over 40 years. I think the grossed-up dividend yield of 5.5% looks attractive to me.

Foolish takeaway

I really like the look of both of these ASX 200 shares. Many others may be too expensive considering all of the COVID-19 uncertainty. At the current prices I’d probably go for Brickworks because of its defensive property and investment assets. But I’d happily buy both next week.

More reading

• Why I’m desperate to add CSL and 2 other ASX shares to my portfolio in 2020
• What are the best ASX shares for dividends?
• Top brokers name 3 ASX 200 shares to sell today
• Forget bank interest, try these ASX 200 dividend shares!
• Why G8 Education, InvoCare, Megaport, & Webjet shares are tumbling lower

Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Brickworks, Telstra Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended InvoCare 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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