The Bubs Australia Ltd (ASX: BUB) share price has outperformed the A2 Milk Company Ltd (ASX: A2M) in May by soaring more than 20%. 

Much of Bubs recent share price success can be attributed to its announcement of a new major supply agreement with Coles Group Ltd (ASX: COL) and other domestic retailers. This agreement means Bubs Organic Grass Fed Infant Formula will be on the shelves of more than 480 Coles supermarkets from June 2020, complementing existing products in its Goat Milk Infant formula and Organic Toddler snacks. Other retailers to join Coles in selling Bubs products in-store include Baby Bunting Group Ltd (ASX: BBN) and Woolworths Group Ltd (ASX: WOW). 

Bubs have also expanded their product range to include an organic cow milk formula which will see them cater to a market larger than goat’s milk by moving into the cow’s milk segment which accounts for over 90% of the Australian formula market. 

Bubs half-year result 

The Bubs share price showed it wasn’t impressed with the company’s half-year results released in February. The results may have missed expectations, or the timing of the report may have coincided with the initial outbreak of the coronavirus epidemic and consequent market sell-off. 

The company outlined a 39% increase in net revenue and a significant 24% increase in its gross margins. Its EBITDA loss slightly worsened due to a 269% increase in marketing and promotional costs to support its domestic presence and building brand awareness in China. This is reminiscent of A2 Milk’s significant increase and investment in marketing in its FY19 full-year report. In its 1H20 report, it commented that the increased levels of investment in marketing and capability development translated into accelerated growth in its China label business. 

A strong driver of its growth has been the sales of Bubs’ Goat Infant Formula which grew 77% on the prior corresponding period. Other revenue streams showed moderate growth with its Organic Baby Food growing 23% and Adult Goat Milk Powder increasing 30%. Its fresh milk and yoghurt products looked to struggle the most, falling 49%. 

Foolish takeaway 

Bubs are securing the right partnerships and making worthwhile investments to strengthen its brand, however, while it is making all the right moves, given the fact that it is not yet a cash-generating business I wouldn’t consider it a ‘safe’ investment. All things considered, though, down the track Bubs could prove a worthy buy for the medium to long term. 

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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of A2 Milk, COLESGROUP DEF SET, and Woolworths Limited. The Motley Fool Australia has recommended BUBS AUST FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Aristocrat Leisure Limited (ASX: ALL) share price is rallying ahead of its first half profit results tomorrow.

Investors are anticipating good news as shares in the gaming machine maker jumped 1.5% to $27.21 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) inched up 0.4%.

But there’s still room to climb as I believe management will unveil results that will justify Aristocrat being a $30+ stock.

Growing despite COVID-19

Brokers like Citigroup believe it can deliver double digit earnings growth despite the COVID-19 shutdown that forced casinos like Crown Resorts Ltd (ASX: CWN) and Star Entertainment Group Ltd (ASX: SGR) to close.

“We expect strong growth in Digital and Americas in AUD terms to offset declines in ANZ and International Class III,” said Citigroup.

“No dividend will be declared to shore up liquidity; and the focus will be on the outlook for 2H20e given the gradual reopening of casinos underway in the US and the expected reopening of Australian customers in 4Q20e.”

Focus on digital, not dividend

I doubt the market will be disappointed if Aristocrat canned its interim dividend. It’s a similar case with building materials supplier James Hardie Industries plc (ASX: JHX) where the main reason investors buy these stocks is for their growth potential and not skinny dividends.

The thing to watch closely when Aristocrat releases its results is growth in its digital (social gaming) division. This is likely to be the group’s main growth engine going forward.

Mobile gaming apps were gaining strong traction before coronavirus struck. Measures undertaken around the world to keep people at home to prevent the spread of the disease meant even more are likely to embrace the distraction.

Brightening outlook

Having said that, its traditional land-based business (poker machines) could also have turned a corner as its key US market is easing restrictions.

There is a real danger of a second wave of infections in the US. But looking at attitudes towards the virus in that country, I am not sure if even that will be enough to force states into draconian lockdowns.

Key picks in industrials sector

While there are potential challenges waiting in the wings for Aristocrat, the risk-reward equation justifies the stock as a buy.

Aristocrat is one of my key holdings in the industrials sector, along with James Hardie and glove maker Ansell Limited (ASX: ANN).

More reading

• Can we value ASX shares with P/E ratios in 2020?
• Why this ASX funeral share is well positioned for future growth
• ASX 200 down 0.2%: Big four banks lower and TPG announces demerger plans
• Positive signs for Australia’s jobs market as ABS data points to a recovery
• Is the Newcrest Mining share price in the buy zone?

Motley Fool contributor BrenLau owns shares of Aristocrat Leisure Ltd., Ansell Limited and James Hardie Industries plc. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Are you a fan of small cap tech shares? If you are then you’re in luck because there are a good number trading on the ASX right now which I believe have a lot of potential.

Three which I feel would be worth keeping a close eye on are listed below. Here’s why I think they could be stars of the future:

Audinate Group Limited (ASX: AD8)

The first small cap to watch is Audinate. It is a digital audio-visual networking technologies provider that has been growing at a very strong rate in recent years. This has been driven by the increasing demand for its innovative Dante product. This award-winning audio over IP networking solution is being used widely across the professional live sound, commercial installation, broadcast, and recording industries globally. The company also has its eyes on the lucrative Audio & Video (AV) market. If it can dominate this market as well, it could be destined for big things.

ELMO Software Ltd (ASX: ELO)

ELMO is a cloud-based human resources and payroll software company. It provides users with a unified platform that streamlines processes such as recruitment, on-boarding, learning, and payroll. Its platform has been growing in popularity over the last few years thanks to increasing demand and its high retention rate. This has led to ELMO growing its recurring revenues and earnings at a very strong rate. The good news is that it still has a massive addressable opportunity in the ANZ market and the potential to expand globally.

Whispir (ASX: WSP)

A final small cap to watch is Whispir. It is a software-as-a-service communications workflow platform provider. This platform allows companies to deliver actionable two-way interactions at scale using automated multi-channel communication workflows. This helps make operations more efficient and can cut down the number of service desk support calls. I feel a testament to the quality of its offering is it blue chip customer base which includes AGL Energy Limited (ASX: AGL), Foxtel, and Disney.

More reading

• These small cap ASX shares could be stars of the future
• Could these small cap ASX shares be the next Afterpay?
• Why Altium, ELMO, Suncorp, & Webjet shares are sinking lower
• 3 ASX tech shares to buy now for long-term returns
• Leading brokers name 3 ASX shares to buy today

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 and recommends Elmo Software. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Whispir Ltd. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool Australia has recommended Elmo Software and Whispir 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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