The Xero Limited (ASX: XRO) share price is out of form again on Tuesday and dropping lower.

At the time of writing, the business and accounting platform provider’s shares are down 3% to $131.97.

This means the Xero share price is now down 10% since the start of FY 2021 and almost 17% from its all-time high.

Why is the Xero share price dropping lower?

Investors have been selling Xero and other tech shares recently and rotating into value and cyclical stocks.

This has led to the S&P/ASX All Technology Index (ASX: XTX) sinking 5.5% since the turn of the year, compared to a 1.7% gain by the benchmark S&P/ASX 200 Index (ASX: XJO).

Is this a buying opportunity?

One broker that would see the weakness in the Xero share price as a buying opportunity is Goldman Sachs.

Late last year the broker initiated coverage on the company with a buy rating and $157.00 price target.

Based on the latest Xero share price, this price target implies potential upside of 19% for its shares over the next 12 months.

Why does Goldman like Xero?

Goldman Sachs is a big fan of the company’s cloud-based accounting software. It notes that the value proposition for its SME customers includes its ease-of-use, a single source of “truth” (for the business & their accountant), and its ecosystem of 1,000+ best-in-class apps that provide a broad range of software solutions.

It also points out that Xero has a total addressable market (TAM) of NZ$14 billion per annum at present across its key markets. Based on its FY 2020 performance, this means that it has only penetrated 4.6% of this market.

This in itself gives it a long runway for growth. However, the broker sees opportunities for this TAM to grow even larger.

It explained: “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,” it concluded.

All in all, this could make it worth taking a closer look at Xero’s shares after their poor start to the year.

More reading

• ASX 200 down 0.4%: Afterpay tumbles, bank shares lower, gold miners crash
• Why Costa, Monash IVF, Newcrest, & Xero shares are dropping lower
• 5 things to watch on the ASX 200 on Monday
• 5 things to watch on the ASX 200 on Friday
• ASX 200 rose 1.6%

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 the best shares to buy now for the long term is a tough task. The economic outlook is uncertain, and may experience further deterioration in the short run depending on how the coronavirus pandemic progresses. Furthermore, a number of industries could experience major change as a result of the pandemic and its impact on consumer tastes.

As such, buying companies with flexible business models and strategies, as well as capital to invest in long-term growth, could be a shrewd move. They may be better able to adapt to a fluid economic environment.

The best shares may have flexible business models

The best shares to buy today may have strategies and financial positions that can be used to successfully adjust to changing industry trends. For example, companies that have a low proportion of fixed costs may withstand a period of weaker sales should political and economic risks increase.

Similarly, companies that have solid balance sheets may be able to raise capital more easily to invest in new growth areas that have arisen as a result of the coronavirus pandemic.

Investors may be able to unearth such companies by assessing their fundamentals. For example, a company’s annual report and recent investor updates provide information regarding their financial position and strategy.

Businesses with low debt levels and access to substantial credit lines may have the financial flexibility to make necessary adjustments in what could be a period of rapid change. Company strategies that embrace evolving customer tastes may also be more successful in the long run than entrenched plans that become outdated.

Searching for companies with weak near-term outlooks

Of course, the best shares to buy today are likely to offer good value for money. However, the stock market rally in the second half of 2020 means that many high-quality businesses now trade on relatively high valuations.

As such, investors may wish to consider sound companies that are currently experiencing difficult operating conditions. For example, they may be facing disruption caused by coronavirus, or weak demand for their products as a result of declining consumer confidence.

Should they have the financial means to survive the short-term challenges they face, over the long run they may be able to deliver impressive returns due in part to their low prices. They may be among those shares that benefit the most from a long-term stock market recovery.

A diverse range of stocks

It continues to be difficult to assess how the economy will change in the next decade. Some of the best shares may even struggle to adapt and deliver growth in an economy that has an unclear future.

As such, it is a good idea to diversify across a broad range of businesses within a portfolio. Doing so can mean less risk, as well as greater returns as the world economy gradually recovers from the challenges faced in 2020.  

More reading

• Afterpay and Creso Pharma were among the most traded shares on the ASX last week
• What’s with the Legend Mining (ASX:LEG) share price today?
• Are the recent US elections turbocharging the ASX 200?
• Here’s why the Fortescue (ASX:FMG) share price is up 12% in a month
• Leading brokers name 3 ASX shares to sell today

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. 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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Australia’s leading investment platform provider CommSec has released data on the most traded ASX shares on its platform from last week.

Once again, there were a few regulars but also a couple of lesser known shares making the cut.

Here’s the data:

Betashares Nasdaq 100 ETF (ASX: NDQ)

This exchange traded fund (ETF) was the most traded share on the CommSec platform last week. It accounted for 2% of total trades on the platform, with buyers attributable to 85% of them. This ETF is particularly popular with investors as it gives them exposure to the likes of Apple, Amazon, Facebook, and Tesla. After a 30% gain in 2020, investors may be hoping for more of the same in 2021.

Creso Pharma Ltd (ASX: CPH)

This cannabis company was popular with investors again last week. Its shares accounted for 1.8% of trades on CommSec. Approximately 57% of these came from the buy side. That group of investors will have been pleased to see the cannabis company’s shares jump 33% over the period. This gain was driven by news that the Democrats won control of the US Senate. The Democrats are widely expected to decriminalise cannabis in the near future.

Core Lithium Ltd (ASX: CXO)

Core Lithium was a new entry to the top five, with its shares being responsible for 1.8% of trades on the platform. 65% of these trades came from buyers, who bid its shares 55% higher for the week. Investors have been buying lithium shares after the price of the battery making ingredient started to recover.

Afterpay Ltd (ASX: APT)

The Afterpay share price may have lost 1.7% of its value last week, but that didn’t stop the buyers from flooding in. The buy now pay later provider’s shares accounted for 1.7% of trades on CommSec, with 65% of them coming from buyers.

Zip Co Ltd (ASX: Z1P)

This fellow buy now pay later provider was popular with investors again last week. Zip’s shares were responsible for 1.5% of trades on the platform. Though, only 48% of these came from buyers. Despite this, the Zip share price climbed 4.7% over the five days. Some investors may be optimistic that its upcoming second quarter update will be a strong one.

More reading

• Here’s why the Creso Pharma (ASX:CPH) share price is jumping 13% higher today
• The biggest ASX bulls are about to get their faith tested
• 5 things to watch on the ASX 200 on Tuesday
• Why ASX cannabis shares are cheering the US elections
• ASX 200 down 0.4%: Afterpay tumbles, bank shares lower, gold miners crash

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 BETANASDAQ ETF UNITS and ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS. 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 Legend Mining Limited (ASX: LEG) share price, up 9% this year and 50% over the past 12 months, has yet to move today on the company’s latest drill results.

Despite some promising drilling data, the Legend share price is flat in afternoon trading, still sitting at its opening price of 12 cents.

What did Legend Mining report this morning?

In an ASX announcement this morning, Legend Mining said the latest assay results from a diamond drillhole at its Mawson prospect in Western Australia revealed it to be the best hole to date.

The Mawson prospect holds both nickel (Ni), Copper (Cu) and Cobalt (Co).

The results showed nickel values up to 3.26%, copper values up to 3.84%, and cobalt values up to 0.17%. The company said that metallurgical test work is under way.

Commenting on the results, Legend Mining managing director Mark Wilson said:

These assay results are further confirmation of our earlier assessment that hole 34 is the best hole drilled at Mawson to date. The combination of the widths and grades of the massive sulphides in this hole support our conviction that we are dealing with a mineralised system of substance at Mawson.

The purpose of the hole was to conduct Phase 1 metallurgical tests and the results of this test work will be reported once received.

Meanwhile further assay results from 2020 drilling programs are rolling in for compilation and assessment. Once integrated with existing data, they will assist in future drill planning for the 2021 field season.

Legend Mining share price and company snapshot

Legend Mining is an Australian minerals exploration company. The company’s focus is its nickel-copper Rockford Project in the Fraser Range of Western Australia. Legend Mining shares first listed on the ASX in August 1995.

Analysts are widely predicting the demand for nickel and copper to grow, as both metals are needed for the transition to sustainable energy sources and both are used in infrastructure and building construction. Copper prices reached 8-year highs last Thursday, trading at US$8,179 (AU$10,622) per tonne.

Year-to-date, the Legend Mining share price is up 9.1%. That compares to a 0.3% gain for the broader All Ordinaries Index (ASX: XAO).

Despite shares crashing more than 45% during the wider COVID-19 market selloff in February and March last year, patient Legend Mining shareholders are unlikely to be complaining.

Over the past 12 months the Legend Share price is up 50%. The All Ords, over that same time, remains down 0.7%.

More reading

• The Neuren (ASX:NEU) share price is falling today despite positive news
• Why the Cann Group (ASX:CAN) share price is moving today
• Why the IMEXHS (ASX:IME) share price soared 6% higher today
• Why the DroneShield (ASX:DRO) share price is surging higher
• Here are the best All Ordinaries performers of 2020

Motley Fool contributor Bernd Struben 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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At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is trading flat at 6,695 points. The ASX 200 still isn’t quite at the heights we saw back in February last year, when it hit a new record high of 7,162.5 points just before the coronavirus-induced market crash.

Even so, we are getting pretty close to those levels again. Since the start of the year, the ASX 200 has really hit the ground running. Even though the new year is only 12 days in (and 7 trading days), the index is already up 0.7% for the year to date.

That doesn’t seem like a lot on face value, but if that pattern holds all year, the ASX 200 would be in for a rollicking good time in 2021.

But why are shares continuing to climb? Let’s be frank, there hasn’t exactly been a stack of good news in 2021 so far, whether that be on the economic or coronavirus fronts.

Well, it’s possible that what’s happening in the United States is helping enormously. I know how that sounds less than a week after the shocking scenes in the US Capitol building emerged.

US Senate elections send shares higher

It has to do with the (somewhat overshadowed) Senate elections that took place last week on 5 January (6 January our time). These were the runoff elections for the 2 US Senate seats of the state of Georgia.

Against the odds, the Democratic Party won both seats in the conservative Southern state. That puts the balance of power in the Senate evenly divided between Democrats and Republicans at 50-50.

And those wins mean that once president-elect Joe Biden and vice president-elect Kamala Harris are sworn in, the Democrats will control the US Senate. Why? According to the US constitution, the vice president breaks a Senate tie if the chamber is evenly split.

That also means that, come 20 January, divided government will end. And the Democratic Party will control the ‘trifecta’ of the House of Representatives, the Senate, and the White House for the first time since 2010.

This situation is what’s got investors hot under the collar. As an indication, the ASX 200 is up 1.9% since 6 January, even though it’s only up 0.7% year to date.

But why? What do US politics have to do with the Australian share market?

Well, as you might gather, the performance of the US markets are one of (if not the) largest influences over our own ASX. And the Democratic sweep of the Congress has also gotten American investors fired up. The US S&P 500 Index (INDEXSP: .INX) is up 2.75% since 5 January.

So what’s so exciting about the Democrats winning control of Congress?

The importance of the ‘trifecta’

Well, in the US, laws need to advance through both Houses of Congress and be signed by the president to become law. If any of those branches are controlled by another party, it greatly reduces the chances of all but the most bipartisan bills becoming law.

But since all 3 are going to be in Democratic hands come 20 January, Joe Biden’s party can get much of their agenda through without Republican support.

According to reporting in the Australian Financial Review (AFR), the priorities for the incoming Biden Administration are going to revolve around a lot more stimulus spending. Over the past month, outgoing President Donald Trump, as well as the Democrats, have been calling for a round of US$2,000 stimulus cheques to go out to most Americans.

But the Republican Senate blocked this measure. It instead limited the cheques to US$600. According to the AFR, one of the first cabs off the rank on 20 January will be getting the larger cheques out as soon as possible.

Additionally, the Democrats are also hoping to ink a new large-scale infrastructure spending bill, send additional monetary aid to the states, and increase spending in healthcare. And that is, of course, in addition to the unprecedented level of monetary easing (near-zero interest rates and quantitative easing (QE)) that the US Federal Reserve is promising to keep up going forward.

All of this stimulatory spending bodes extremely well for the US economy, but more importantly the share market. And that is why investors, both over in the US, and here in Australia, have been sending shares higher in 2021 so far. After these positive developments for investors as we kick off 2021, it will be interesting to see where the rest of the year takes us.

More reading

• Here’s why the Fortescue (ASX:FMG) share price is up 12% in a month
• ASX 200 up 0.4%: Altium disappoints, ARB impresses, Mesoblast charges higher
• Capital returns galore from cashed-up ASX retail stocks
• The biggest ASX bulls are about to get their faith tested
• 5 things to watch on the ASX 200 on Tuesday

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. 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 Fortescue Metals Group Limited (ASX: FMG) share price was one of the rather surprising standout performers on the S&P/ASX 200 Index (ASX: XJO) in 2020.

Last year, Fortescue delivered a 115% return to investors. This result was not including the hefty dividend payments shareholders also were happy to receive throughout the year (when, incidentally, many other ASX blue chips were slashing their payouts).

The ASX iron ore miner started 2020 at just under $11 a share, but finished the year up at just a touch over $23 a share. That phenomenal annual return was just the latest piece of good news that long-term Fortescue shareholders have been treated to. Over the past 5 years, this company has given investors an incredible return of 1,529%.

But these numbers have not prevented Fortescue from exploring new heights in recent weeks. Fortescue shares are up another 12.4% over the past month alone. The miner also hit a new all-time high share price of $26.40 a share just last Friday. So why are Fortescue shares continuing to soar of late?

Fortescue shareholders rake in the dough

Well, the most obvious reason why Fortescue shares are exploding ever higher is the soaring price of iron ore itself. As we speak, iron ore is trading for US$169.14 a tonne. That’s a level we haven’t seen since the ‘mining boom’ days of 2012.

Cast your mind back to 23 November, and iron ore was going for ‘just’ US$124 a tonne. This is obviously a massive appreciation and benefits Fortescue disproportionately. Because a miner’s costs to extract ore are relatively fixed, any extra cash the miner can get for its iron pretty much flows straight to the bottom line.

This explains why Fortescue is not the only ASX miner climbing to new perches recently. BHP Group Ltd (ASX: BHP) has also been hitting new all-time highs recently, as has Rio Tinto Limited (ASX: RIO).

But Fortescue (along with the other ASX iron miners) is also benefitting from the political landscape over in the United States. According to reporting in the Australian Financial Review (AFR), the recent US senate elections have also helped. Given President-elect Jo Biden’s Democratic party will soon control the Senate as a result of the Democrats winning two Senate seats in Georgia, the party now controls all three branches of the US government. That means that larger stimulus spending, particularly on infrastructure, is now far more likely in the next two years. More infrastructure spending in the world’s largest economy means more demand for steel. And the key ingredient for making steel is, of course, iron ore.

Is the Fortescue share price a buy today?

I’m sure there are many investors out there who are wondering if it’s too late to buy into Fortescue at these heights. One broker who thinks it might be is Goldman Sachs. This broker currently has a ‘hold’ rating on Fortescue shares, with a price target of just $20.18 a share. That implies a potential downside of almost 20% on current prices.

More reading

• Are the recent US elections turbocharging the ASX 200?
• ASX 200 up 0.4%: Altium disappoints, ARB impresses, Mesoblast charges higher
• Capital returns galore from cashed-up ASX retail stocks
• The biggest ASX bulls are about to get their faith tested
• 5 things to watch on the ASX 200 on Tuesday

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. 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 Monday I looked at three ASX shares that brokers have given buy ratings to this week.

Unfortunately, not all shares are in favour with them right now. Three that have just been given sell ratings are listed below.

Here’s why these brokers are bearish on these ASX shares:

AGL Energy Limited (ASX: AGL)

According to a note out of Credit Suisse, its analysts have retained their underperform rating and cut the price target on this energy company’s shares to $11.10. The broker believes AGL Energy will have to battle with a sizeable decline in wholesale energy prices in the future. In light of this, it sees significant downside to its earnings in the coming years and has downgraded its estimates to reflect this. The AGL Energy share price is changing hands for $11.97 this afternoon.

Magellan Financial Group Ltd (ASX: MFG)

A note out of Goldman Sachs reveals that its analysts have retained their sell rating and $52.52 price target on this fund manager’s shares. The broker believes that Magellan is not well-positioned for an environment of unified democratic control of government in the US. It also notes that its funds under management fell 1.6% in December due to negative investment returns of 2.1% and its performance fees fell short of expectations. The Magellan share price is under pressure today and has now fallen below this target to $49.55.

QBE Insurance Group Ltd (ASX: QBE)

Analysts at Macquarie have retained their underperform rating and cut the price target on this insurance giant’s shares to $7.70. The broker has concerns over the company operating without a permanent CEO in these tough times and sees risks ahead in FY 2021 because of this. Furthermore, due to the large loss that QBE is expecting in FY 2020, Macquarie is forecasting a significant dividend cut. The QBE share price is trading at $8.51 today.

More reading

• ASX 200 drops 0.9%
• Why the QBE (ASX:QBE) share price is in focus today
• What’s been happening with the Magellan (ASX:MFG) share price?
• 3 highest yielding ASX dividend shares
• Here are 3 ASX shares trading near their 52-week lows

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. 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 Sezzle Inc (ASX: SZL) share price is up 5.44% today, after the company reported a record fourth quarter FY20 performance.

At the time of writing, shares in the ASX buy now, pay later player are swapping hands for $6.59.

New records every month

According to this morning’s update, Sezzle reached new heights every month during its fourth quarter. These gains span across the company’s underlying merchant sales (UMS), active consumers, active merchants and repeat usage numbers. 

Merchant fees, which represented 84% of Sezzle’s total income in the first half of 2020, rose a whopping 195.6% year-over-year to reach US$17.2 million in the fourth quarter.

These latest results aren’t the first time Sezzle has come to the table with record highs. In December, the company announced reaching new peaks for the month of November and four days of the Black Friday/Cyber Monday weekend.

Advancing strategic objectives to boost the Sezzle share price

During the most recent quarter, Sezzle continued taking big steps to expand its industry footprint. As a result of a holiday-period marketing campaign that ran over November and December 2020, the company reported that it more than doubled the pace of daily Sezzle downloads.

Another significant win for Sezzle during the fourth quarter involved teaming up with GameStop Corp (NYSE: GME), the world’s largest video game retailer. Sezzle is now available at GameStop’s more than 3,300 stores as well as online and in GameStop’s mobile app. 

Some thoughts from the CEO

Chairman and CEO Charlie Youakim commented on these results: 

We are extremely excited by the strong momentum in our business. In 4Q20, each month we achieved new records for UMS, Active Consumers, Active Merchants, and Repeat Usage. December’s UMS outpaced November’s (unlike last year’s) even with Cyber Monday moving from December in 2019 to November this year.

Our large enterprise and international expansion efforts are paying dividends as evidenced by our recent addition of GameStop and the growth rates we are experiencing in Canada and India that are exceeding the U.S.

A closer look at Sezzle

Sezzle is a rapidly growing fintech company on a mission to increase the purchasing power for over two million active consumers. The company does this by offering interest-free instalment plans at online stores and select in-store locations in the US.

Over the past 12-month period, the Sezzle share price has launched nearly 240% higher. At the time of writing, the Sezzle share price is sitting at $6.59 per share, giving the company a current market capitalisation of $1.23 billion.

More reading

• How to invest in ASX shares in a post-COVID world 
• 3 exciting ASX payment shares to buy in January
• ASX sector of the year: BNPL goes from strength to strength
• Here are 6 of the top performing ASX fintech shares of 2020
• 3 exciting small cap ASX shares to buy

Gretchen Kennedy has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends GameStop and Sezzle Inc. The Motley Fool Australia has recommended Sezzle Inc. 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 some ASX shares that fund managers love the look of. They may be able to generate good returns in 2021 for investors.

In this article is an auto parts business, an IT telecommunications provider and a business involved in digital payments.

Here they those ideas:

Bapcor Ltd (ASX: BAP)

Bapcor is an auto parts business. It’s an ASX share that fund manager Wilson Asset Management likes.

Almost a month ago the company gave a trading update which said that in FY21, to the end of November, revenue was up 26% and net profit after tax (NPAT) benefited from operating leverage from lower expenses in areas such as travel and other areas of discretionary expenditure as well as lower interest rates and the contribution from Truckline, which wasn’t included in the prior corresponding period.

For the first half of FY21, Bapcor thinks revenue growth will be at least 25% and net profit after tax growth will be at least 50%.

WAM said that the ASX share has benefited from an increase in domestic travel, reduced usage of public transport and increased second hand car sales. The fund manager also said that Bapcor has a strong balance sheet and WAM believes it’s well placed to make earnings accretive acquisitions.

Pushpay Holdings Ltd (ASX: PPH)

Pushpay is an electronic donation business. It mainly facilitates electronic donations to large and medium churches in the United States.

Fund manager Ben Griffiths from Eley Griffiths said: “Over the last 12 months it has become clear Pushpay is at an inflection point for both cashflow and earnings. Under the stewardship of CEO Bruce Gordon, Pushpay has transitioned from a founder-led investment phase into an optimize/monetization phase. What is more surprising is the very conservative nature of the accounts (a rarity in small cap tech, outside Iress Ltd (ASX: IRE)). We believe the next few years for Pushpay will be rewarding and that COVID-19 will accelerate the already entrenched trend to digital giving/engagement from cash.”

Just today the ASX share updated the market to say that it was increasing its FY21 guidance again. The earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF) range is now expected to be between US$56 million to US$60 million, up from a guidance range of US$54 million to US$58 million.

Pushpay also announced that it had appointed a CEO from within its ranks. Molly Matthews will take the reins in a couple of months.

Over The Wire Holdings Ltd (ASX: OTW)

Over The Wire is an IT telecommunications provider. It has a market capitalisation of approximately $214 million according to the ASX. The Over The Wire share price has fallen by almost 20% over the last two months.

This ASX share is a holding of NAOS Small Cap Opportunities Company Ltd (ASX: NSC), which is run by Naos Asset Management.

Over The Wire has various segments 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 that Over The Wire will be able to win over clients with its broad array of services, it can help potential clients with complex needs.

One of the main reasons that Naos is bullish about the ASX share is that it has made two acquisitions which could increase the EBITDA by $14 million over the next two years.

The fundie thinks the ASX share could have a normalised EBITDA annual run rate of more than $35 million in FY22 which could result in significant free cash flow generation and could see Over The Wire command a premium EBITDA multiple.

More reading

• Why ARB, Mesoblast, Pushpay, & Super Retail shares are racing higher
• Why the Pushpay (ASX:PPH) share price could shoot higher today
• Got money to invest? Here are 3 ASX shares to buy
• Top brokers name 3 ASX shares to buy next week
• 3 stellar ASX shares to buy in January

Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd and PUSHPAY FPO NZX. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended IRESS Limited, Over The Wire Holdings Ltd, and PUSHPAY FPO NZX. 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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With multiple vaccines looming and low interest rates, many industries are looking good for a recovery out of the COVID-19 recession.

But one credit agency worries that the retail real estate investment trust (REIT) subsector has been permanently damaged.

“The fallout from COVID-19 will linger beyond lockdowns for rated retail REITs around the world,” said S&P Global Ratings credit analyst Rhys Corry. 

“For Australian and New Zealand retail landlords, revenues plunged over the past few months as stores were shuttered and tenants were unwilling or unable to pay their scheduled rents.”

On the ASX, the most prominent retail REITs include Scentre Group (ASX: SCG), Vicinity Centres (ASX: VCX) and Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP).

While REIT landlords executed capital raisings, cut dividends and slashed expenditure to get through the toughest periods last year, the world has changed for the worse for this subsector.

“The structural pain will prolong as faster adoption of e-commerce and changing consumption patterns continue to buffet the sector,” reported the analyst agency.

“S&P Global Ratings expects the fallout from the pandemic to extend well beyond lower rental collections over the next few months.”

Australia’s now tasted online shopping and it can’t go back

Online shopping has been a looming headwind for many years but the transition to it had been gradual – until the coronavirus hit in 2020.

S&P Global Ratings’ reported a stunning 200,000 Australian households shopped online for the very first time just in the month of April 2020.

“COVID-19 has driven previously reluctant consumers online and encouraged online take-up at a much faster rate than we have witnessed in the past,” S&P Global Ratings reported.

“We believe that much of this online shift represents a more permanent change in consumption trends.”

Many retailers were caught out last year not having a sufficient virtual presence. Their scramble to remediate this had a flow-on impact to their ability to pay rent.

“Given many retailers were already struggling financially leading into the pandemic, the additional investment required in online capability has strained their already stretched balanced sheets,” read the S&P Global Ratings report.

And in Australia, the level of online retail activity still lags behind other comparable nations – leaving plenty of more room for growth.

“The level of e-commerce sales as a proportion of in-store retail sales remains well below markets such as China, the UK, and the US. However, the COVID-19 pandemic has fast tracked growth in online sales, intensifying pressure on retail landlords.”

Sales-linked rent agreements

The struggles in the retail sector have seen some tenants request sales-based rental contracts.

Traditionally in Australia, commercial rent has been a fixed amount regardless of the fortunes of the tenant business.

But the coronavirus pandemic has pushed tenants to call for the sales-based model that’s used in some overseas markets. This would mean landlords receive less in bad times, but also a bit more in good times.

S&P Global Ratings warned if this campaign was successful, it would have negative impacts on retail REITs.

“Fundamentally, it would likely increase the cost of capital and worsen the debt capacity and credit quality of our rated REITs.”

The agency reported Australian REITs have so far resisted the calls for sales-based rents. But if one of them caves, the whole industry could be impacted irreparably.

“Risks remain that landlords of lower-quality shopping centres could succumb to tenant demands and allow sales-based leasing deals to maintain occupancy levels. This could reverberate through the sector, triggering competition among landlords for tenants.”

Big international chains are no longer reliable tenants

The S&P Global Ratings report also noted big “anchor” tenants are no longer reliable to fill vast amounts of shopping mall space.

“These tenants, including retailers such as UNIQLO, H&M, and Zara, had previously been eager to fill space, underpinning centre expansions,” the report read.

“Since the pandemic, however, Zara and H&M announced the permanent closure of a number of stores in their global store network (1,200 stores and 250 stores, respectively) as they both turn their attention to e-commerce. In October 2020, H&M launched its dedicated Australian online store and loyalty program, which offers free delivery.”

More reading

• Why the Vicinity Centres (ASX:VCX) share price is down 38% in 1 year
• What’s in store for the Scentre (ASX:SCG) share price in 2021?
• Investors caught in crossfire as ASX retailers battle ASX property stocks in 2021
• These were the worst performing ASX 200 shares last week
• The ASX sectors hardest hit by COVID-19 in 2020

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property 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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