Last week saw a number of broker notes hitting the wires once again. Three buy ratings that caught my eye are summarised below.

Here’s why brokers think investors ought to buy them next week:

Cochlear Limited (ASX: COH)

According to a note out of the Macquarie equities desk, its analysts have retained their outperform rating and $241.00 price target on this hearing solutions company’s shares ahead of its half year results. While trading conditions are expected to have been tough, the broker appears optimistic that the second half will be stronger and Cochlear will grow ahead of the industry by winning market share from competitors. The Cochlear share price ended the week at $206.41.

Megaport Ltd (ASX: MP1)

A note out of UBS reveals that its analysts have retained their buy rating and lifted their price target on this elastic interconnection services provider’s shares to $16.90. This follows the release of the company’s half year results last week. UBS was pleased with the update and believes the company’s outlook is improving following some COVID disruptions. The Megaport share price was fetching $14.03 at Friday’s close.

Telstra Corporation Ltd (ASX: TLS)

Another note out of UBS reveals that its analysts have retained their buy rating and $3.70 price target on this telco giant’s shares following the release of its half year results. According to the note, Telstra delivered operating earnings in line with the broker’s expectations. Looking ahead, UBS expects Telstra to achieve the mid to upper end of its FY 2021 operating earnings guidance. In addition to this, the broker was pleased with the performance of InfraCo and suspects Telstra could command an attractive fee for its mobile towers when it attempts to monetise them. The Telstra share price ended the week at $3.25.

More reading

• 2 standout ASX results from last week
• How to generate $50,000 a year from ASX dividends
• Brokers name 3 ASX shares to buy right now
• Telstra (ASX:TLS) share price rises as brokers pass judgement on its profit result
• Why brokers rate these 4 ASX shares a buy this month

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 MEGAPORT FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Cochlear Ltd. and MEGAPORT FPO. 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 are few reasons why the Xero Limited (ASX: XRO) share price could be worth watching for the coming years.

What is Xero?

Xero describes itself as a cloud-based accounting software platform for small businesses globally. With Xero, it says that small business owners and their advisors have access to real-time financial data any time, anywhere on any device. Xero offers a platform of over 800 third-party apps and over 200 connections to banks and other financial partners.

What was the most recent result like?

Xero revealed its FY21 half-year result in November 2020.

It said that operating revenue increased by 21% to NZ$410 million. Xero’s total subscriber numbers went up 19% to 2.45 million.

Whilst average revenue per user (ARPU) decreased by 4% to NZ29.81, annualised monthly recurring revenue rose by 15% to NZ$877.5 million.

HY21 earnings before interest, tax, depreciation and amortisation (EBITDA) went up 86% NZ$120.7 million. Xero’s net profit after tax (NPAT) went up NZ$33.1 million to NZ$34.5 million and free cash flow rose NZ$49.4 million to NZ$54.3 million.

The total lifetime value of subscribers rose 15% to NZ$6.17 billion and the gross profit margin percentage increased from 85.2% in the prior corresponding period to 85.7%.

3 reasons why the Xero share price could be interesting

1: SaaS model

Software as a service (SaaS) simply means delivering a regular service in the form of software, such as accounting software.

Xero subscribers pay a monthly fee, which generates consistent cashflow for the company. Some investors view SaaS revenue as being quite defensive, particularly if those customers are sticky and loyal.

2: Growing market position

Xero is steadily gaining market share across the different geographies that it operates.

In the FY21 half-year result, it saw Australian subscriber numbers increase by 21% to 1.01 million, UK subscribers grew by 19% to 638,000 with revenue rising 33%, New Zealand subscribers went up 13% to 414,000, North American subscribers went up 17% to 251,000 and ‘rest of world’ subscribers went up 37% to 136,000. Growth was led by South Africa, and the company said that further progress was made in Singapore.

3: Strong operating leverage

Xero has been re-investing a lot of its revenue growth back into the business. In the current COVID-19 operating environment, Xero has been more careful with its spending which has shown how much its profit measures can grow when it’s not investing so hard.

One of the statistics that shows the operating leverage strength of Xero is the gross profit margin of 85.7%.

In the above HY21 result numbers, revenue increased by NZ$71.2 million, EBITDA increased by NZ$55.9 million and free cashflow went up NZ$49.4 million. That suggests that the incremental EBITDA margin and the free cashflow margin are high.

Xero’s final comments

Xero shared some comments about its outlook in the HY21 result. It said that it’s a long-term orientated business with ambitions for high-growth. Management said that the business continues to operate with disciplined cost management and targeted allocation of capital. Xero said this will allow the company to remain agile so it can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in the operating environment.

More reading

• Take a look at the ASX’s new cloud ETF
• 2 extraordinary ASX shares to buy in 2021
• What’s with the Xero (ASX:XRO) share price drop today?
• 4 steps to pick winning ASX shares
• 2 ASX 200 shares to buy for growth

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. 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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Once again, a large number of broker notes hit the wires last week. Some of these notes were positive and some were bearish.

Three sell ratings that caught my eye are summarised below. Here’s why top brokers think investors ought to sell these shares next week:

A2 Milk Company Ltd (ASX: A2M)

A note out of Citi reveals that its analysts have retained their sell rating and cut the price target on this infant formula company’s shares to $9.40. According to the note, the broker believes the tough trading conditions a2 Milk Company is facing will persist in the second half. In addition to this, the broker has concerns over increasing demand in China from domestic brands and structural pressures in the local market. The a2 Milk share price was fetching $9.96 at Friday’s close.

AGL Energy Limited (ASX: AGL)

According to a note out of UBS, its analysts have retained their sell rating and put a $10.10 price target on this energy company’s shares. This follows the release of a half year result last week which fell short of the broker’s estimates. And while the broker notes that the company is attempting to offset the tough trading conditions by cutting costs significantly, UBS doesn’t believe it will be enough to stop its earnings from falling meaningfully in the coming years. The AGL share price ended the week at $11.05.

Galaxy Resources Limited (ASX: GXY)

Analysts at Credit Suisse have downgraded this lithium miner’s shares to an underperform rating with an improved price target of $2.10. According to the note, the broker was happy with its performance in FY 2020 and its guidance for the year ahead. However, that isn’t enough to stop Credit Suisse from downgrading its shares to underperform on valuation grounds. The Galaxy share price was trading at $2.53 at Friday’s close.

More reading

• Is the A2 Milk (ASX:A2M) share price a buy?
• Here’s why the AGL (ASX:AGL) share price is climbing higher today
• ASX 200 down 0.1%: Telstra update impresses, AMP sinks, Newcrest jumps
• Why the AGL Energy (ASX:AGL) share price continues to sink lower
• Leading brokers name 3 ASX shares to sell today

Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia owns shares of and has recommended A2 Milk. 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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Could the Fortescue Metals Group Ltd (ASX: FMG) share price be worth buying for its dividend right now?

What is Fortescue Metals Group?

Fortescue describes itself as one of the global leaders in the iron ore industry with its mining assets in Pilbara, Western Australia. The company was only founded in 2003 by Andrew Forrest.

It has fully integrated operations in the Pilbara including the Chichester and Solomon mining hubs and it’s developing the Western Hub, home to the new Eliwana mine. The Iron Bridge Magnetite Project, which it says is an industry-leader in cost and energy efficiency, will be one of the highest-grade magnetite projects in the world according to Fortescue.

Whilst its main focus is iron ore, it is undertaking exploration activities in New South Wales and South Australia, as well as in Ecuador and Argentina, and preliminary exploration activities on tenements that are in application in Colombia, Peru, Portugal and Kazakhstan, prospective for copper, gold and lithium.

It was also recently announced that Fortescue is exploring ‘green hydrogen’ and the possibility and making steel with iron and hydrogen instead of coal.

What’s going on with the dividend right now?

We’ll soon find out what Fortescue plans to do with its FY21 half-year dividend because the result is scheduled to be released on 18 February 2021.

Based on the trailing twelve months of dividends, Fortescue has a grossed-up dividend yield of 10.5%.

However, there are some financial analysts that think that the dividend could be about to get a lot bigger. For example, the brokers at Macquarie Group Ltd (ASX: MQG) think that in FY21 Fortescue could pay a dividend of $2.04 per share, with a dividend of $1.36 per share in FY22. That would translate to a FY21 grossed-up dividend yield of 12.2%.

There are others with even bigger dividend expectations. Using numbers on Commsec, Fortescue has an estimated grossed-up FY21 dividend yield of 18.4%. Broker UBS has forecast Fortescue could pay a whopping $3.69 per share dividend in FY21, which would translate to a grossed-up dividend yield of 22%.

Fortescue recently announced that it has generated US$940 million of net profit after tax for the month of December 2020. The miner also said that its preliminary net profit after tax for the six months ended 31 December 2020 is in the range of US$4 billion to US$4.1 billion despite COVID-19.

Is the Fortescue share price a buy?

Broker Macquarie does think that Fortescue shares are a buy and it has a price target of $26.50 on the iron ore miner with strong iron ore prices supporting earnings.

However, broker Morgan Stanley is one of the most bearish on the miner. The FY21 second quarter production and shipments were behind Morgan Stanley’s forecast. The broker thought that shipments for FY21 would be 184Mt, however Fortescue’s guidance is for iron ore shipments to be between 175Mt to 180Mt. It has a price target on Fortescue of $17.45

Fortescue has also provided guidance of C1 costs of between US$13 per wet metric tonne (wmt) to US$13.50 per wmt. Capital expenditure is expected to be between US$3 billion to US$3.4 billion.

More reading

• 5 things to watch on the ASX 200 next week
• 2 ASX dividend shares to boost your income
• 3 reasons why the Rio Tinto (ASX:RIO) share price is up today
• 2 blue chip ASX dividend shares to buy today
• How big will the ASX bank dividends be in 2021 and beyond?

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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The S&P/ASX 200 Index (ASX: XJO) was out of form last week and tumbled lower following a mixed bag of results. The benchmark index dropped 0.6% to end the period at 6,806.7 points.

Another busy week lies ahead for investors. Here are five things to watch next week:

ASX futures pointing notably higher

The Australian share market looks set to start the week on a very positive note. According to the latest SPI futures, the ASX 200 is expected to open the day 37 points higher on Monday morning. This follows a solid finish to the week on Wall Street. On Friday night the Dow Jones rose 0.1%, the S&P 500 climbed 0.5%, and the Nasdaq index also rose 0.5%.

Nearmap short seller response and half year update

On Monday the Nearmap Ltd (ASX: NEA) share price will return from its trading halt. The aerial imagery technology and location data company requested a trading halt on Thursday in order to respond to a short seller attack. Hong Kong-based J Capital alleges that Nearmap is struggling in the U.S. market and using accounting tricks to hide this. Nearmap intends to bring forward the release of its half year results and release both together.

Mining giants’ updates

It will be a big week for the resources sector next week with results due to be released by BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Rio Tinto Limited (ASX: RIO). Thanks to the sky high iron ore price, all three are tipped to deliver bumper profits and pay big dividends to shareholders. BHP is reporting on Tuesday, Rio Tinto is on Wednesday, and Fortescue will release its results on Thursday.

CSL half year results

The CSL Limited (ASX: CSL) share price will be on watch when it releases its highly anticipated half year results on Thursday. According to CommSec, the biotech giant is expected to report a net profit after tax of US$1.4 billion and declare an interim dividend of 97 U.S. cents. All eyes will on its outlook and particularly its comments regarding challenging plasma collections because of COVID-19. As plasma is a vital ingredient in many key therapies, there are concerns that input costs could rise and weigh on margins.

Coles update

On Wednesday the Coles Group Ltd (ASX: COL) share price could be on the move when it releases its half year results. According to a note out of Goldman Sachs, its analysts are expecting Coles to report group sales of $20,585.9 million for the half. This will be an increase of 9.2% on the prior corresponding period. And on the bottom line, the broker is forecasting a 10.5% increase in underlying net profit after tax to $540.4 million. This is expected to lead to an interim dividend of 34 cents per share being declared.

More reading

• 2 excellent blue chip ASX 200 shares to buy
• 2 ASX dividend shares to boost your income
• How to generate $50,000 a year from ASX dividends
• Here’s how to make a $1 million share portfolio by investing $1,000 a month
• These were the best performing ASX 200 shares last week

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. and Nearmap Ltd. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended Nearmap Ltd. 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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Respected fund manager Wilson Asset Management (WAM) has recently identified two ASX shares that it owns in its portfolio.

WAM operates several listed investment companies (LICs). Two of those LICs are WAM Capital Limited (ASX: WAM) and WAM Research Limited (ASX: WAX).

There’s also one called WAM Leaders Ltd (ASX: WLE) which looks at the larger businesses on the ASX.

WAM says WAM Leaders actively invests in the highest quality Australian companies.

The WAM Leaders portfolio has delivered gross returns (that’s before fees, expenses and taxes) of 12.8% per annum since inception in May 2016, which is superior to the S&P/ASX 200 Accumulation Index average return of 8.6%.

These are the two ASX shares that WAM outlined in its most recent monthly update, which were two of the largest contributors of performance for the month:

Wesfarmers Ltd (ASX: WES)

Wesfarmers is described by WAM Leaders as an Australian conglomerate with diverse business operations, owning household names including Bunnings, Kmart, Target, Catch and Officeworks. It also operates in multiple other industries with its chemical, energy and fertilisers (WesCEF) division and industrial and safety division.

WAM said that Bunnings and Officeworks have been notable beneficiaries of the coronavirus pandemic as Australians spent more time working and renovating at home, and recent retail sales data indicates this momentum is continuing into 2021.

Bunnings is also set to leverage ongoing strength in the housing market, according to WAM Leaders. There is record property prices and new housing loan approvals significantly beating expectations in January.

A further catalyst for the ASX share is the potential for mergers and acquisitions, with approximately $4 billion on the balance sheet after the sell down of its stake in Coles Group Limited (ASX: COL).

WAM Leaders said that Wesfarmers has a strong track record of value enhancing transactions, and either a large acquisition or multiple bolt-ons will help diversify its growth runway over the coming years.

The Wesfarmers share price is valued at 29x FY21’s estimated earnings.

Incitec Pivot Ltd (ASX: IPL)

The fund manager said that this business is a global diversified industrial chemicals company that manufactures and distributes industrial explosives, industrial chemicals and fertilisers.

One of the key drivers of the Incitec Pivot share price is commodity prices, according to WAM Leaders.

In January, ammonia, urea and DAP fertiliser prices went up strongly, driven by improved seasonal conditions, strong soft commodity prices, constrained supply and improved industrial demand. The fund manager said that this has more than offset the stronger Australian dollar (partially mitigated by the company’s foreign exchange hedging program) and higher natural gas prices.

WAM Leaders expects that the fertiliser price momentum will continue to support the share price, with earnings upside outweighing potential headwinds facing the Australian coal market.

The Incitec share price is valued at 15x FY22’s estimated earnings according to Commsec.

More reading

• 2 blue chip ASX dividend shares to buy today
• ASX 200 Weekly Wrap: RBA unleashes ASX’s inner animal
• 2 super ASX 200 shares to buy for your retirement portfolio
• Brokers name 3 ASX shares to buy right now
• Why the Wesfarmers (ASX:WES) share price has soared 24% in a year

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET 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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Could the Webjet Limited (ASX: WEB) share price be a buy right now?

The Webjet share price has fallen by 10% since 8 February 2021.

What has happened recently?

Over the last week the state of Victoria went from having 0 community COVID-19 cases for almost a month, to now having 20 active cases, with potentially all of them being the highly infectious UK strain of the coronavirus.

The whole of Victoria is now in a 5-day lockdown to act as a “circuit breaker” against the spread of COVID-19. Victoria is now in stage 4 restrictions, which will see people only be able to leave for four reasons: essential work, exercise, care and caregiving and shopping for essential supplies. The exercise and shopping will be allowed for a 5km distance from home. Masks will need to be worn everywhere except in your own home, with no visitors.

This relates to Webjet because lots of people’s travel plans into and out of Victoria will have been disrupted by this latest setback.

How has Webjet fared since the onset of the COVID-19 pandemic

In October, the company held its annual general meeting (AGM).

It reminded investors that it achieved a record FY20 first half result and provided full year guidance for earnings before interest, tax, depreciation and amortisation (EBITDA) of $162 million to $172 million. At the time, when COVID-19 was emerging in Asia, the travel industry’s previous experience with SARS and MERS pointed to a six-month recovery period.

Full year FY20 total transaction value (TTV) was down 21% on the prior year at $3 billion, revenue was down 27% to $266.1 million and underlying operating EBITDA dropped 80% to $26.4 million.

To tackle this, Webjet reviewed its strategy, people, technology, operating costs, investments and the balance sheet. It raised capital to ensure its survival. That involved raising $346 million for Webjet at a share price of $1.70 per new share. The money was used to strengthen the balance sheet and support the unwind of negative working capital and reduction of debtor exposure.

The company has been working on putting the building blocks in place to win market share and be more profitable in all its businesses so that’s it’s well placed when travel markets do open.

Webjet’s WebBeds transformation strategy is aimed at becoming the number one global player in the business to business (B2B) space. It’s also aiming to do well in the domestic travel market until international markets open again.

Webjet worked hard to reduce costs to around half (50%) of the previous level from a mix of job reductions, four-day working weeks and pay cuts, as well as reductions in other operating expenditure. The Webjet exclusives and Online Republic cruise businesses were closed.

Is the Webjet share price a buy?

There is a mix of views. Ord Minnett thinks Webjet shares are worth a buy, it has a price target of $5.65 on the travel business because of sound fundamentals and a return to a more reasonable valuation.

However, Morgan Stanley has a price target of $3.40 for Webjet because Webjet has a harder path to making profit than competitor Corporate Travel Management Ltd (ASX: CTD). Webjet also is more reliant on the international border to open and vaccines to be distributed.

More reading

• Why AVITA, Baby Bunting, Kathmandu, & Webjet shares are sinking
• Here are the 10 most shorted shares on the ASX
• To short or not to short? GameStop (NYSE:GME) ripple effect endures
• Here are the 10 most shorted shares on the ASX
• Top brokers name 3 ASX shares to buy next week

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. 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 construct a balanced portfolio, having a few blue chip ASX shares in there could be a smart move.

The reason for this is that blue chip shares tend to be companies that are well-known, long-established, and have strong financial positions. Essentially, they aren’t going anywhere any time soon.

This should allow investors to make long term investments that benefit from compounding.

But which blue chip ASX shares should you buy? Two that are highly rated are listed below:

BHP Group Ltd (ASX: BHP)

If you’re not averse to investing in the resources sector, then BHP could be worth considering.

The Big Australian owns a diverse portfolio of world class and low cost operations across the globe. While it has exposure to a wide range of commodities, the key one right now is iron ore.

Thanks largely to the sky high iron ore price, but also favourable prices of other commodities, BHP has been tipped to deliver a bumper profit result in FY 2021.

Analysts at Ord Minnett are very positive on the mining giant. They currently have a buy rating and $52.00 price target on its shares. Ord Minnett believes BHP is well-placed to outperform in the post-COVID environment.

Ramsay Health Care Limited (ASX: RHC)

Another ASX blue chip share to look at is Ramsay Health Care. It is a leading private healthcare company with operations across the world.

Although trading conditions were tough for Ramsay in 2020 because of the pandemic, things are starting to improve.

For example, analysts at Goldman Sachs believe Ramsay is trading largely as normal in Australia now. This is a big positive given that an estimated two-thirds of its earnings are generated in the local market.

Looking ahead, the broker feels Ramsay is well-placed to benefit from a catch up in procedures that were delayed during the pandemic.

Goldman Sachs has a conviction buy rating and $70.00 price target on its shares.

More reading

• 4 steps to pick winning ASX shares
• ASX 200 Weekly Wrap: RBA unleashes ASX’s inner animal
• 5 things to watch on the ASX 200 on Thursday
• Why BHP, Estia Health, HUB24, & South32 shares are dropping lower
• ASX coal stocks increasingly isolated with rise of start-ups like MGA Thermal

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care 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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Are you looking to buy some dividend shares next week? Then listed below are two shares that might be worth considering.

Here’s why they are being tipped as dividend shares to buy:

Accent Group Ltd (ASX: AX1)

Accent could be a dividend share to buy. It is the leading leisure footwear retailer behind popular retail store brands such as HYPEDC, The Athlete’s Foot, and Platypus.

It was a strong performer in FY 2020 and has carried over this positive form into the current financial year. Accent recently revealed first half like for like sales growth of 12.3% excluding stores closures.

Analysts at Citi are positive on the company.  In response to its update, the broker put a buy rating and $2.60 price target on its shares.

Furthermore, Citi is forecasting the company to pay an 11 cents per share dividend in FY 2021. Based on the current Accent share price, this represents a fully franked 4.85% dividend yield.

Fortescue Metals Group Limited (ASX: FMG)

Another ASX dividend share to look at is Fortescue. Over the last few years this mining giant’s shares have generated mouthwatering returns for shareholders.

This has been driven by improving grades, cost reductions, production and shipment growth, and favourable iron ore prices.

In respect to the latter, the spot iron ore price is currently fetching ~US$160 a tonne last week. This compares incredibly favourably to Fortescue’s current C1 costs of US$12.74 per wet metric tonne.

This is expected to lead to strong cash flow generation and bumper dividends for investors in FY 2021.

One broker that is forecasting big dividends is Macquarie. It expects the company to reward shareholders with a fully franked interim dividend of $1.37 per share this month.

Based on the current Fortescue share price, this interim dividend alone represents a yield of 5.75%.

For the full year, the broker estimates that its shares offer an ~8.5% yield.

Unsurprisingly with such a generous yield, Macquarie rates Fortescue as a buy. It has an outperform rating and $26.50 price target on its shares.

More reading

• 3 reasons why the Rio Tinto (ASX:RIO) share price is up today
• 2 blue chip ASX dividend shares to buy today
• How big will the ASX bank dividends be in 2021 and beyond?
• Top brokers name 3 ASX shares to buy today
• ASX 200 Weekly Wrap: RBA unleashes ASX’s inner animal

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent Group. 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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Respected fund manager Wilson Asset Management (WAM) has recently identified two ASX shares that it owns in its portfolio.

WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Research Limited (ASX: WAX).

There’s also one called WAM Capital Limited (ASX: WAM) which targets “the most compelling undervalued growth opportunities in the Australian market.”

The WAM Capital portfolio has delivered an investment return of 16.3% per annum since inception in August 1999, before fees, expenses and taxes. This gross return outperformed the S&P/ASX All Ordinaries Accumulation Index return of 8.3% per annum over the same timeframe.

These are the two ASX shares that WAM Capital outlined in its most recent monthly update:

Bega Cheese Ltd (ASX: BGA)

WAM describes Bega Cheese as a leading Australian dairy and food company. It has 2,000 employees and produces 236,000 tonnes of dairy products each year.

The fund manager explained that the dairy company is undertaking a strategic shift in its operations to move production and volume higher up the dairy value chain, de-risking exposure to pure commodity markets.

In January, Bega announced the successful acquisition of Lion Dairy & Drinks for $534 million.

The acquisition will double the ASX share’s annual revenue to $3 billion, strengthen Bega Cheese’s dairy footprint and will see a significant expansion of the company’s domestic distribution network.

Fletcher Building Limited (ASX: FBU)

WAM describes Fletcher Building as a manufacturer of building products, a diversified construction business and partner on major infrastructure projects, with 10,000 employees across New Zealand, 5,000 in Australia and 800 across the South Pacific.

The fund manager said that data from the Australian Bureau of Statistics (ABS) showed housing loan construction commitments rose 119% in 2020. A record low interest rate environment, together with accommodative policies from the Australian government, such as the homebuilder grant, will continue to support building materials companies such as Fletcher Building going forward and WAM expects earnings upgrades to come through at the upcoming half-year result.

At the company’s annual general meeting (AGM) it gave guidance that FY21 first half earnings before interest and tax (EBIT) and before significant items is expected to be in the range of $305 million to $320 million. In the first half of FY20, EBIT before significant items was $219 million. That means that Fletcher Building is expecting half-year underlying EBIT to rise by 39.2% to 46%.

More reading

• Should you buy ASX shares that are takeover targets?
• The Bega (ASX:BGA) share price is trading lower on “significant day”
• This fund manager names 2 surging ASX shares to watch
• 4 ASX shares that helped this fund outperform in December

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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