Category: Stock Market

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

I’ll cut right to the chase: Yes, AstraZeneca plc (NASDAQ: AZN) could be a millionaire-maker stock. But no, it’s not very likely for most investors. Really, those are the correct answers for nearly any stock when asked if it could make someone a millionaire.

What’s more instructive, though, is to understand what it would take for a given stock to deliver the returns to build such a fortune. It’s also helpful to know what kind of gains a stock could realistically generate, even if it probably won’t be a millionaire-maker. You might be surprised how AstraZeneca fares on both of these fronts.

What it would take

Let’s first delve into what it would take for AstraZeneca to be a millionaire-maker. Of course, it depends largely on two critical factors: (1) the initial investment, and (2) what the investing time horizon is.

Investing writers like myself usually look at an initial investment of $10,000. For that amount to grow to $1 million, AstraZeneca’s share price would need to multiply by a factor of 100. With the big drugmaker’s market capitalisation currently hovering around $140 billion, that would require AstraZeneca’s market cap to explode to $14 trillion.

Given a long enough period of time, that kind of growth could happen. However, we’re talking about a really long timeframe. For example, if AstraZeneca’s stock price appreciated 15% annually, it would take around 33 years to become a 100-bagger. Over the last 20 years, by the way, the big pharmaceutical stock has increased at an annual rate close to 2.5%.

Starting with a much larger initial investment could easily make AstraZeneca a millionaire-maker. If you invested $800,000 in the stock, for instance, you’d only need a 25% return to reach $1 million. Of course, most investors don’t have that much money to invest in a single stock. 

What’s more likely

Now that’s out of the way, let’s turn to something more practical: What kind of return could AstraZeneca realistically generate? You’ll probably like the answer to this one.

While AstraZeneca hasn’t performed all that great over the last two decades, it’s a different story over the last two years. That’s because AstraZeneca is a much different company than it was 20 years ago and even 10 years ago.

Today, AstraZeneca has a lineup loaded with products with strong sales growth. Cancer drugs Tagrisso, Imfinzi, Lynparza, and Calquence are rocking. Diabetes drug Farxiga and asthma drug Fasenra continue to enjoy solid momentum.

The pharma company’s pipeline is also strong. AstraZeneca has over 170 clinical programs in development. These include 24 late-stage programs. One of those is the company’s COVID-19 vaccine AZD1222. Even though AstraZeneca caused confusion with its interim efficacy results announced last month, it could still be a major player in the coronavirus vaccine market. 

Wall Street analysts project that AstraZeneca will generate average annual earnings growth of more than 19% over the next five years. If the stock appreciates at a similar rate, an initial investment of $10,000 would grow to nearly $24,000 in five years.

What if AstraZeneca managed to keep up that growth rate for another 10 years? The initial investment would swell to over $135,000. To be candid, it would be difficult for AstraZeneca to deliver that kind of growth over a 15-year period. However, with the company’s strong pipeline it’s not out of the question.

The bottom line is that AstraZeneca probably won’t make you a millionaire. However, it could make you plenty of money. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• 3 key advantages Moderna holds over Pfizer and AstraZeneca
• Why AstraZeneca’s potential vaccine is more exciting than you think
• Why Moderna Is Less Risky Than You Think
• ASX energy shares surge ahead as oil rises to 9-month high
• Why fund manager optimism is at almost 3-year highs

Keith Speights has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Xero Limited (ASX: XRO) share price has been a strong performer in 2020.

Since the start of the year, the cloud-based business and accounting software provider’s shares have jumped almost 67% higher.

Is it too late to buy Xero shares?

According to a note out of Goldman Sachs, its analysts believe the Xero share price could still go higher from here.

This morning the broker commenced coverage on the company with a buy rating and $157.00 price target.

This implies potential upside of just over 18% for its shares over the next 12 months.

Why is Goldman Sachs bullish on Xero?

Goldman Sachs likes Xero due to the quality of its offering, its large and growing total addressable market (TAM), and its attractive unit economics.

The broker commented: “We estimate Xero has a core TAM of NZ$14bn p.a. across its key markets (4.6% penetrated in FY20). However as it broadens and monetizes its app ecosystem, and expands into new geographies, we estimate this will open a further NZ$62bn in addressable TAM, providing a multi-decade runway for strong revenue growth. Combined with attractive unit economics at maturity (GSe 40% EBIT margins), we believe the long-term earnings opportunity for Xero is material.”

What is it expecting in the coming years?

At the end of the first half of FY 2021, Xero had a total of 2.45 million subscribers and was generating annualised monthly recurring revenue (AMRR) of NZ$877.6 million.

Goldman believes this can grow materially over the 2020s.

It explained: “Based on our penetration assumptions of new market opportunities, which are below current market launch performances, we think Xero can achieve a 2030 subscriber footprint of 7.4mn, generating NZ$3.4bn in annual revenues.”

This, combined with the monetisation of its ecosystem, is expected to underpin strong earnings growth over the decade.

Goldman commented: “A key driver of earnings will be its ability to increasingly monetize the application ecosystem that it has built. This could be done through revenue share agreements (app-by-app, introducing a broader platform fees) or through M&A (example: its purchase of Waddle), which we see as increasingly likely.”

“We estimate that by more aggressively monetizing its ecosystem, Xero can increase its addressable TAM by NZ$44bn in potentially extremely high margin revenues (i.e. app-store fee likely 100% margin). Hence we see material upside to XRO ARPU,” it added.

Overall, while it sees the second half of FY 2021 as challenging due to COVID headwinds, the broker believes Xero’s long term opportunity is considerable.

More reading

• 5 things to watch on the ASX 200 on Monday
• How to benefit from the cloud computing boom with ASX shares
• These ASX shares are growing rapidly in FY 2021
• Why the Xero (ASX:XRO) share price zoomed 20% higher in November
• Why healthcare, tech and consumer staples shares underperformed the ASX 200 in November

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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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In this article are two quality exchange-traded funds (ETFs) that have been providing long-term returns for many years.

What does an ETF do?

In the above link is a breakdown of an ETF, but in summary in provides investors exposure to a group of assets or businesses through a single investment. You don’t have to go out and buy the 100, 500 or thousands of individual businesses yourselves.

This would save a lot on brokerage and it also provides instant diversification. This diversification can supposedly lower risks because if there’s a problem with one business (or sector) then the exposure to the other businesses and sectors can mitigate that.

Here are two examples:

Vanguard Msci Index International Shares ETF (ASX: VGS)

This ETF is about investing in the global share market in numerous companies based in many countries around the world.

It was actually invested in around 1,550 holdings as at the end of October 2020. It gives exposure to many of the world’s largest businesses. Its top 10 holdings include: Apple, Microsoft, Alphabet, Facebook, Johnson & Johnson, Proctor & Gamble, Nestle, Nvidia and Visa.

Looking at the sector weightings, this ETF has a 22% holding of IT shares, a 13.5% position in healthcare shares, a 12% weighting to consumer discretionary businesses, an 11.7% position in financials businesses and a 10.5% weighting to industrials. The other sectors have a weighting of less than 10%.

The United States gets the biggest allocation of the ETF as it’s the biggest economy and it’s where many global companies are listed. Around 68% of the ETF is invested in US businesses. However, it also has a 8.1% allocation to Japan, a 4% weighting to the UK, a 3.2% holding of French shares, a 3.2% weighting to Switzerland, a 3.1% allocation to Canada and a 2.8% holding of German shares. There are many other countries with representation such as the Netherlands, Sweden, Denmark, Spain and Italy.

Fees can have a major impact on the overall net returns of an investment. Vanguard Msci Index International Shares ETF has an annual management fee of just 0.18%.

In terms of net performance, this ETF has returned an average of 11.1% per annum since November 2014 and 8.6% per annum over the past five years.

According to Vanguard, this ETF has a dividend yield of just over 2% with a return on equity (ROE) ratio of 16.4%.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

VanEck, an ETF provider, says that this ETF gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages according to Morningstar’s equity research team.

This one has many less holdings compared to the global Vanguard one. It has 48 positions. and its biggest positions are different to the biggest companies in the world. The largest holdings are: Applied Materials, Corteva, Charles Schwab, Microchip Technology, Boeing, Compass Materials International, Aspen Technology, Yum! Brands, Cheniere Energy and American Express.

In terms of sector allocation with a double digit weighting, there is a 22.2% allocation to IT, an 18.2% weighting to healthcare, a 17.1% holding of financial businesses, an 11.3% weighting of industrial companies and a 10.1% position in consumer staples.

Despite VanEck Vectors Morningstar Wide Moat ETF’s annual fee of 0.49% per annum, it has produced bigger long-term returns than the Vanguard ETF. Over the past five years it has produced net returns of 16% per annum. This has actually been stronger than iShares S&P 500 ETF (ASX: IVV) as well.

More reading

• Want to invest like Warren Buffett? This ASX ETF is all about ‘the moat’
• 10 hottest (and coldest) Aussie ETFs right now
• 2 leading ETFs to buy for global returns

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF and Vanguard MSCI Index International Shares ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There is at least one fund manager that thinks the share prices of big banks like National Australia Bank Ltd (ASX: NAB) are a buy.

Fund manager Rhett Kessler recently revealed that his Australian share fund from Pengana Capital Group Ltd (ASX: PCG) was increasing exposure to the major ASX banks.

What has NAB recently announced?

A month ago the big four ASX bank announced its FY20 result. There were various different profit measures to look at, but they all showed a double digit profit decline.

NAB’s cash earnings fell by 36.6% to $3.71 billion. Excluding large notable items, cash earnings fell by 25.9%. Statutory net profit after tax dropped 46.7% to $2.56 billion.

During the year, the big bank suffered a 201% increase of credit impairment charges to $2.76 billion. As a percentage of gross loans and acceptances, the ratio worsened from 31 basis points to 46 basis points. This included an allocation for targeted sectors experiencing elevated levels of risk including aviation, tourism, hospitality and entertainment, retail trade and commercial property.

NAB also said that the ratio of loans that are more than 90 days past due increased by another 10 basis points to 1.03% largely due to rising delinquencies in the Australian home loan portfolio where customers are not part of the COVID-19 deferral program. Eligible customers receiving COVID-19 payment deferrals are treated as performing in accordance with APRA guidance.

The net interest margin (NIM) declined by 1 basis point to 1.77%. However, excluding a 1 basis point reduction from ‘markets and treasury’ which includes the impact of holding higher liquid assets, NIM was flat with the benefits of home loan repricing and lower wholesale funding costs offset by impacts of the low interest rate environment combined with competitive pressures.

However, excluding all the ‘one-offs’, revenue was only down 1.5% and expenses only grew by 2%. Expenses went up because of its refresh strategy, higher technology costs (including strengthening its compliance and control framework), salary increases and COVID-19 costs. However, these were offset by productivity benefits, lower performance-based compensation and reduced travel and entertainment costs.

What has the NAB share price done?

Like most other ASX shares, the NAB share price has been recovering since March 2020. However, it has recovered at a different pace. It didn’t really do much between June and September. But since the start of October 2020 the NAB share price has gone up by 30%.

In that time the result of the US election and the results of COVID-19 vaccine trials have made headlines.

Why Pengana likes big banks

There are a few different areas about why Pengana thinks that the big four ASX banks look interesting.

Whilst valuation has been broadly supportive for some time now, the outlook for the banks benefited in particular through the month by evidence of accelerating home loan growth (supported by low-interest rates and first homeowner support), a supportive federal budget; improving housing finance approvals; house prices holding up better than expected, a meaningful reduction in loan deferrals and lower than anticipated loss provisioning.

What is NAB’s valuation?

At the current NAB share price it’s valued at under 14x FY23’s estimated earnings according to Commsec projections. In FY23 it’s also predicted to pay a dividend of $1.16 per share, which equates to a grossed-up dividend yield of 7.2%.

More reading

• 5 things to watch on the ASX 200 next week
• Here are the ASX bank shares rated as a buy today
• Macquarie (ASX:MQG) share price lags on $2.3bn takeover
• Banks rejoice: House prices to return to 2019 levels
• CBA (ASX:CBA) and the ASX banks just had an amazing month

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Every Monday I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Webjet Limited (ASX: WEB) is still the most shorted share on the ASX and experienced a jump in short interest to 15%. Short sellers appear to believe the market is getting ahead of itself and that its shares are overvalued at the current level.
• Western Areas Ltd (ASX: WSA) has seen its short interest rebound to 11.6%. Short sellers have been going after the nickel producer after management downgraded its production guidance.
• Speedcast International Ltd (ASX: SDA) still has short interest of 9.3%. The communications satellite technology provider’s shares have been suspended for almost the entire year as it undertakes a recapitalisation.
• InvoCare Limited (ASX: IVC) has short interest of 8.6%, which is flat week on week. Tough trading conditions and potential market share losses have been weighing on its shares recently.
• Tassal Group Limited (ASX: TGR) has seen its short interest rise to 8.5%. Concerns over its uncertain near term outlook could be why short sellers are targeting the salmon producer.
• Inghams Group Ltd (ASX: ING) has 8.2% of its shares held short, which is down slightly week on week. An improvement in the poultry company’s performance in FY 2021 hasn’t scared of short sellers just yet. They appear concerned with potentially high input costs.
• A2 Milk Company Ltd (ASX: A2M) has jumped into the top ten with 8.2% of its shares held short. Short sellers appear to be betting that the infant formula company will fall short of its guidance this year due to weakness in the daigou channel.
• Myer Holdings Ltd (ASX: MYR) has seen its short interest fall to 7.4%. The department store operator has been struggling in the current operating environment and reported a massive loss in FY 2020.
• Galaxy Resources Limited (ASX: GXY) is back in the top ten with short interest of 7.3%. Short sellers may believe the lithium miner’s shares have climbed too far over the last few months and are now overvalued.
• AVITA Therapeutics Inc (ASX: AVH) has entered the top ten with 7.3% of its shares held short. The regenerative medicine company’s shares have come under pressure this year after COVID-19 had a negative impact on its sales in FY 2020.

More reading

• The meaning of ‘diversification’ when it comes to ASX shares
• Are ASX stocks about to get an earnings upgrade boost in the new year?
• 2 stellar ASX growth shares to buy in December
• 4 small cap ASX dividend shares with large yields
• Flight Centre and Mesoblast were among the most traded shares on the ASX last week

James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited. The Motley Fool Australia owns shares of and has recommended A2 Milk and Webjet Ltd. The Motley Fool Australia has recommended Avita Medical Limited and InvoCare Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article is about three small cap ASX shares that could be worth watching at the moment.

Smaller businesses have the possibility of producing good performance over time because they are much earlier on in their growth journey.

Here are three examples:

Sezzle Inc (ASX: SZL)

Sezzle is a buy now, pay later (BNPL) company that is based in the United States.

The whole BNPL sector is growing at a quick rate, but Sezzle is one that’s growing at an even faster pace.

It recently gave an update for its performance over November 2020. It said that its underlying merchant sales (UMS) jumped 188.5% to US$113 million and annualised UMS also went up 188.5% to US$1.36 billion.

Sezzle’s UMS is being driven by rapidly rising active consumers and active merchants. In November, active consumers rose by 151.5% to 2.07 million and active merchants grew by 164.5% to 24,846.

The recent Black Friday and Cyber Monday saw UMS of US$28.5 million, which was a 146.4% increase for the small cap ASX share.

Sezzle executive Chair Charlie Youakim said: “We are extremely excited about the direction of our business, as we recently partnered with GameStop and eCommerce platform Wix. Sezzle is now offered at Gamestop’s network of more than 3,300 US retail stores, its online store and in the GameStop mobile app. Our integration on Wix is available to all Wix merchants in the US, Canada, India and in the future will be able in other regions as Sezzle expands internationally.”

Over The Wire Holdings Ltd (ASX: OTW)

Over The Wire is a favourite of fund manager NAOS Small Cap Opportunities Company Ltd (ASX: NSC) at the moment.

This business has a number of offerings including a national voice network, public cloud, cyber security services and on-demand cloud connectivity. The company also recently acquired Digital Sense, which mostly provides services to large and government clients. Over 90% of Digital Sense’s revenue is recurring in nature.

Naos believes the small cap ASX share can generate much higher earnings before interest, tax, depreciation and amortisation (EBITDA) over the next 24 months and, along with higher free cash flow generation, could see the company command a higher EBITDA multiple.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara is a healthcare technology business. It provides breast imaging analytics and analysis products that improve clinical decision-making and the early detection of breast cancer.

The small cap ASX share aims to reduce the mortality and cost of breast cancer by providing clinically validated software that underpins personalized, high-quality breast cancer screening.

A couple of weeks ago, Volpara released its FY21 half-year result where it reported growth of its total revenue by 38% to NZ$9.5 million, with annual recurring revenue up to NZ$19.9 million (up from NZ$15.7 million last year). Subscription revenue rose 71% to NZ$8.8 million.

The company reported that approximately 27% of women in the US had a group product applied on their images and data compared to approximately 25.8% at the end of the prior corresponding period.

Volpara also reported that its gross profit increased by 43% to NZ$8.7 million which represented an increase in the gross profit margin to 92% (up from 89%).

In terms of the outlook, Volpara is continuing to see a high retention rate and growing average revenue. Most new sales now are for two or three products, which represents much higher average revenue per user (ARPU). Volpara says it has a pipeline of new deals. It’s being successful with upselling as it upgrades its MRS 6 users (from the MRS System acquisition) and start moving MRS 7 users to Aspen Breast and Volpara products – this is creating an increase of 200% to 300% of recurring revenue.

The small cap ASX share is also looking for acquisition opportunities which would increase its customer base or improve its skills and products to help increase ARPU and technology.

More reading

• Sezzle (ASX:SZL) share price higher after delivering more explosive growth
• Why the Afterpay (ASX:APT) share price continues to dominate
• 3 exciting small cap ASX shares rated as buys
• Volpara (ASX:VHT) share price falls on half-year results
• Afterpay (ASX:APT) share price under pressure by US BNPL giant

Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends VOLPARA FPO NZ. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia has recommended Over The Wire Holdings Ltd, Sezzle Inc, and VOLPARA FPO NZ. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re wanting to add a few blue chip dividend shares to your portfolio, then you may want to check out the ones listed below.

Here’s why these ASX shares come highly rated:

Coles Group Ltd (ASX: COL)

Coles is of course one of Australia’s leading supermarket operators and most recognisable brands. Thanks to a combination of its defensive qualities, store expansion, and long track record of same store sales growth, Coles has been growing its top and bottom lines at a solid rate in recent years.

This certainly was the case in FY 2020 when Coles’ sales surged during the height of the pandemic. Pleasingly, this positive form has continued in FY 2021, with sales across the business growing strongly in the first quarter.

Analysts at Citi appear confident that this can continue. The broker recently retained its buy rating and lifted the price target on the Coles share price to $21.20. It expects groceries demand to remain strong over the medium term. It also notes that margins are firming up thanks to rational competition in the industry. The broker is forecasting a 63.5 cents per share fully franked dividend in FY 2021. Based on the current Coles share price, this represents a 3.5% dividend yield.

Telstra Corporation Ltd (ASX: TLS)

It has been a tough few years for this telco giant, but with its T22 strategy delivering on its objectives, the NBN headwind easing, and 5G internet taking off, its outlook has improved greatly in recent months. In addition to this, the company has announced plans to split into three separate entities. This has been well-received by the market and is expected to unlock value for shareholders.

Credit Suisse appears to be a fan of this plan. Its analysts suggested that it reinforces its view around the underlying value of Telstra’s assets. The broker also believes the company is well-placed to maintain its 16 cents per share dividend for the foreseeable future. Based on the current Telstra share price, this means a fully franked 5.25% dividend yield. Credit Suisse has an outperform rating and $3.85 price target on its shares.

More reading

• 2 highly rated ASX dividend shares to buy
• Goldman says buy the Metcash (ASX:MTS) share price ahead of next week’s results
• The Telstra (ASX:TLS) dividend yield is creeping higher
• Which ASX 200 sectors performed the best in November? 
• Why the Telstra (ASX:TLS) share price stormed 14.5% higher in November

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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On Friday the S&P/ASX 200 Index (ASX: XJO) finished a positive week on a high. The benchmark index rose 0.3% to 6,634.1 points.

Will the market be able to build on this on Monday? Here are five things to watch:

ASX futures pointing higher.

The Australian share market looks set to start the week on a positive note after a solid finish on Wall Street. According to the latest SPI futures, the ASX 200 is poised to open the week 42 points or 0.6% higher. On Friday night, the Dow Jones jumped 0.8%, the S&P 500 climbed 0.9%, and the Nasdaq rose 0.7%. This led to the Dow Jones reaching a new record high.

Metcash half year results.

The Metcash Limited (ASX: MTS) share price will be on watch this morning when the wholesale distributor releases its half year results. According to a note out of Goldman Sachs, its analysts are expecting Metcash to report an 11.5% increase in revenue to $7,011 million and an underlying net profit after tax of $116.3 million. Metcash’s sales are expected to be driven by a 7.6% increase in Food sales, a 12% lift in Liquor sales, and a 27.5% jump in Hardware revenue.

Oil prices rise.

Energy producers including Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) could push higher today after oil prices finished the week strongly. According to Bloomberg, the WTI crude oil price rose 1.4% to US$46.26 a barrel and the Brent crude oil price climbed 1.1% to US$49.25 a barrel. This led to oil prices recording their fifth successive weekly gain.

Gold price flat.

Gold miners such as Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) will be on watch today after a subdued finish to the week. According to CNBC, the spot gold price edged 0.1% lower to US$1,840 an ounce. Despite the soft finish, the precious metal recorded a solid weekly gain.

Xero rated as a buy.

The Xero Limited (ASX: XRO) share price could be heading higher from here according to Goldman Sachs. This morning the broker initiated coverage on the cloud-based business and accounting software provider with a buy rating and $157.00 price target. Goldman believes its total addressable market will increase significantly in the future. Which, combined with attractive unit economics, means it believes the long-term earnings opportunity for Xero is material.

More reading

• Top brokers name 3 ASX shares to buy next week
• 5 things to watch on the ASX 200 next week
• These were the worst performing ASX 200 shares last week
• These were the best performing ASX 200 shares last week
• ASX 200 goes up on Friday

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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Finding top stock picks for 2021 may seem like a daunting task to some investors. The 2020 stock market crash and an uncertain economic outlook mean that the prospects for many companies are difficult to accurately assess.

However, by focusing on companies with solid financial positions and wide economic moats when they trade at low prices, it may be possible to unearth the best shares for 2021. They could produce the strongest performances over the long run.

Assessing financial strength among potential top stock picks

The uncertain economic outlook means that today’s top stock picks may be those businesses with solid financial positions. They may be able to more easily overcome what could prove to be a tough period for many industries and regions over the coming months.

Analysing a company’s financial position can be done by taking a look at its annual report and recent trading updates. They provide information on areas such as its debt levels, how many times its operating profit covered interest costs and the amount of liquidity it has available. All of these areas can make a real difference to its ability to not only survive what could be a volatile 2021, but to also use an uncertain period to its advantage in terms of making acquisitions and innovating.

Analysing a company’s competitive position

Top stock picks for 2021 may also be those companies that can outperform their sector peers as a result of a competitive advantage. For example, they may have a unique product, enjoy strong brand loyalty or have a lower cost base than their rivals. This can make a real difference to their profitability both in difficult economic circumstances and when a period of strong growth takes place.

Therefore, focusing on a company’s competitors could be a sound move. It may highlight the strengths and weaknesses of a business that are not always obvious. They may make an impact on how successful it proves to be from an investment perspective.

Ensuring a margin of safety is obtained

As ever, the top stock picks of today could prove to be those companies that trade at a large discount to their intrinsic values. In other words, their share prices currently undervalue their long-term financial prospects. This may provide them with greater scope to deliver capital appreciation over the coming years.

Therefore, assessing a company’s value, in terms of metrics such as price-to-earnings (P/E) ratio and price-to-book (P/B) ratio, on a standalone and relative basis could be a worthwhile move. It may allow an investor to determine which companies in a specific sector offer the best value for money. They may be among the top performers in 2021 and beyond, and could have the biggest positive impact on an investor’s portfolio.

More reading

• How to get a passive income of $50,000 per year from ASX dividend shares
• Top brokers name 3 ASX shares to sell next week
• 2 ASX dividend shares with generous yields
• $250 a month to invest? Here’s how I’d aim to turn it into $1m
• 3 of the best ASX shares to buy in December

Motley Fool contributor Peter Stephens 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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Owning ASX dividend shares can be one of the most rewarding experiences on the share market. In contrast, growth shares like Afterpay Ltd (ASX: APT), which pay no dividend but promise a white-knuckle ride through ups and downs on the market, can be fun (and highly lucrative) in their own way.

But there’s nothing quite like holding a dividend share, and getting paid every three or six months just for the act of not selling. One could even think of the whole process as a reward for laziness. Indeed, many investors invest in ASX shares solely for this purpose. Dividends can provide, or supplement, an income stream that one can use to retire on, or at least support a higher standard of living that one might aspire to.

But just how much do you need to have invested to generate, say, $50,000 a year in dividends – an amount roughly double the current Age Pension rate for a single person?

2 ends of the dividend stick

Well, it depends on your portfolio and the investments you make. You could have everything you own invested in an ASX dividend share like Fortescue Metals Group Limited (ASX: FMG), which currently offers a market-leading, trailing yield of 8.57%, or 12.24% grossed-up with full franking credits. Well, you would only need to invest $408,500 in Fortescue shares today to receive a dividend and franking credit stream worth $50,000 a year.

But that assumes Fortescue keeps its current dividends in place for time immemorial. That is a very flimsy assumption to make given the volatility of the price of iron ore that Fortescue mines. If iron ore hypothetically plummeted from the ~US$135 per tonne level we see today (historically very high) to US$50 per tonne next week, you could bet with near certainty that Fortescue would be slashing its dividends very quickly soon after.

That’s why very few investors (if any) would actually have all of their money tied up in Fortescue (or any other single company for that matter).

So which ASX dividend shares to choose? If you wanted to target reliability instead of large (and volatile) raw yield, you might be drawn to Washington H. Soul Pattinson & Co Ltd (ASX: SOL) instead. Soul Patts has one of the best dividend records on the ASX, having increased its dividend payouts every year since the year 2000 (yes, that includes 2020).

But Soul Patts’ current trailing dividend yield is just 2.09%, or 2.99% grossed-up. That means that instead of $408,500, you would need just over $1.67 million to secure an annual income of $50,000 a year in dividends and franking.

Balance is the key for dividends

Now, these are obviously two extremes. Most ASX dividend investors have a broad portfolio of shares, in order to balance individual company risk and increase diversification. So let’s take a broad market exchange-traded fund (ETF) to use as a substitute for this scenario.

The Vanguard Australian Shares High Yield ETF (ASX: VHY) is an example. This fund holds 65 ASX dividend-paying shares across all sectors of the market, which, for illustrative purposes, is a fair substitute for representing a typical dividend portfolio. Vanguard tells us that this ETF has a forecast, grossed-up yield of 6.3% right now. So let’s just take that number as a representation of this ‘typical dividend portfolio’.

So, for an investment into this fund that would generate $50,000 a year in income, you would need an amount of $794,000 invested at this grossed-up yield figure. Naturally, the yields generated from any diversified portfolio of dividend shares can vary from year to year. 

Of course, diversification is important in this scenario, and an ETF like VHY is not an actual substitute for a portfolio of individual dividend shares. If you think of the $794,000 figure as ~$40,000 invested in 20 different ASX dividend shares, you get the idea.

Foolish takeaway

At the end of the day, whether you’re able to generate $50,000 a year in dividend income will depend on which ASX shares your dividend portfolio consists of. But you should probably ‘aim high’ in this case. And it’s worth considering the old parable ‘build your house on rock, not sand’ when it comes to building your passive income from ASX dividend shares.

More reading

• Top brokers name 3 ASX shares to sell next week
• 2 ASX dividend shares with generous yields
• Are ASX stocks about to get an earnings upgrade boost in the new year?
• Is the Afterpay (ASX:APT) share price in the buy zone after its update?
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Sebastian Bowen owns shares of Vanguard Australian Shares High Yield Etf and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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