The ASX has had a tremendous run over the past few months. Since its lows in late-March the S&P/ASX200 Index (ASX:XJO) has surged nearly 37%. However, in my opinion there are a few headwinds that could be facing investors in the near future. Here are some factors to take into consideration when deciding whether or not to sell your ASX shares.  

Have ASX shares run too far?

Around 4 months ago during the height of market volatility, many investors were unsure how companies would ever recover, let alone ever trade at all time highs again. What has transpired over the last few months has been astounding, with some ASX shares making once in a lifetime moves.

A great example of this is Afterpay Ltd (ASX: APT), which hit a low of $8.90 in late March. Many investors questioned how buy now, pay later users would be able to meet their repayment obligations. Despite the pessimism, government income support and the rush to online and cashless retail has fuelled demand for the company’s services.

These moves have not been limited to technology companies, with online retailers like Kogan.com Ltd (ASX: KGN) and meal-kit provider Marley Spoon AG (ASX: MMM) also harnessing the change in consumer behaviour.

Despite government stimulus and certain companies buoying the overall market, many investors might be looking to take profits after such a miraculous run. A gloomy budget deficit, high unemployment forecasts and the looming reporting season could also serve as catalyst for a pullback.

Be wary of the upcoming reporting season

The upcoming reporting season in August is set to be one of the most complex and volatile seasons in recent history. The United States reporting season, which is currently underway, has provided a glimpse of the uncertainty and volatility Australian investors can expect.

Heading into reporting season, many investors would be relatively optimistic given there have not been a significant number of earnings downgrades. However, like all reporting seasons, there are bound to be some surprises.

What to watch this reporting season

It will be interesting to see how companies disclose the impact of the pandemic to investors and how the market will react. Furthermore, with many ASX companies implementing cost-cutting strategies to protect their balance sheets, it will also be fascinating to see how dividend payout ratios are impacted. Shares in the travel sector are already expected to report badly whereas there is more optimism for shares in the health sector. Reporting season will provide an opportunity to find out exactly how the pandemic has impacted the bottom line of companies in the tech sector. Meanwhile, the results for ASX bank shares are also likely to provide good insight into the country’s recovery prognosis.

Foolish takeaway

As a long-term investor I would usually advocate for shareholders to stay invested through the regular troughs and peaks of the sharemarket. However, the share price moves and general market volatility we have seen during the pandemic are an anomaly. Rather than selling the lot, another prudent strategy investors could adopt would be to sell a portion of their holdings to lock in profits. This would keep them invested whilst also freeing up some capital to take advantage of more opportunities that could arise during the August reporting season. 

More reading

• 5 steps to start investing in ASX shares
• Where to invest $100,000 into ASX shares
• 5 simple steps to financial independence
• These BNPL shares have blown up since their IPOs
• 2 ASX shares leveraged to the eCommerce shift

Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Kogan.com 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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In this article I’m going to tell you about three reasons why the Macquarie share price could be a buy.

Macquarie is an investment bank that can trace its history back to 1969. It’s now one of Australia’s largest businesses with a market capitalisation of around $45 billion according to the ASX.

The business boasts of a record of 51 years of unbroken profitability. That’s a very solid record for a financial business in my opinion.

The Macquarie share price has recovered strongly since March 2020 – it’s up almost 75% since 23 March 2020 after the 52.5% drop to $72.

But is it a still a buy? I think there are three reasons why I’d consider the Macquarie share price over other ASX blue chip shares:

International earnings

Plenty of the biggest businesses on the ASX are mostly focused on the domestic economy like the banks, Telstra Corporation Ltd (ASX: TLS), Coles Group Limited (ASX: COL) and Wesfarmers Ltd (ASX: WES).

Macquarie only generates a third of its income from Australia and New Zealand. Meaning that international income account for two thirds of the business. The Americas accounted for a quarter of income in FY20, Asia made up 13% of total income and EMEA (Europe, the Middle East and Africa) accounted for 29% of total income. Macquarie’s share price would be nowhere near as high today without the international earnings. 

I think that’s very important. The economies of Australia and New Zealand are sizeable, but obviously the entire world’s economy is much larger. So it’s better to be able to service the entire globe. It means Macquarie can invest into any region it wants to, wherever it thinks will produce the best return for its money.

Diversified divisions

Macquarie is probably one of the most diverse businesses among the ASX 20. It has four main segments: Macquarie Asset Management (MAM), banking and financial services, Macquarie Capital and commodities and global markets. The earnings diversification has been helpful for the recovery of the Macquarie share price this year in my opinion. For example, IPOs have dropped off but ASX capital raisings have been frequent. 

Plenty of ASX shares are reliant on just one or two main sections to generate profit. But Macquarie makes good profit from each of its divisions. 

Macquarie describes half of its business as ‘annuity style’, meaning it’s defensive and generates consistent income. That refers to MAM and the banking divisions. I’m not sure banking is particularly annuity-like – particularly during COVID-19 – but managing assets is a great earnings stream. Macquarie’s assets under management had grown to $606.9 billion at 31 March 2020. That’s a great benefit to Macquarie.

The best bank

I think Macquarie is by far the best large bank on the ASX.

The big four ASX banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) are not terrible businesses – they just don’t offer much growth or earnings diversification. Loans are not a high-growth area and not very defensive. The Macquarie share price has recovered better than the big four ASX banks’.

I wouldn’t want to diversify my portfolio by buying one of the big four because I believe it would lower my long-term investment returns. But Macquarie has proven it can be a good performer through the economic cycle.

I think Macquarie also showed its quality through the Hayne royal commission. It barely featured whereas the big ASX banks had their reputations tarnished and had to repay large sums of money. 

At this share price, is Macquarie a buy?

I’d much rather buy Macquarie than most other blue chips due to its ability to grow anywhere. At the current Macquarie share price it’s trading at 16x FY22’s estimated earnings. I think that’s a reasonable price to pay for Macquarie shares considering a good amount of dividend income should be paid over the long-term as well, though the dividend is a bit uncertain due to COVID-19 at the moment. 

More reading

• Emergency funds: Are they still important?
• Top fund manager names favourite ASX growth shares
• Why the BlueScope share price is outperforming today
• Why CBA and Macquarie shares could be in the buy zone
• ASX 200 Weekly Wrap: Blue chip shares pull ASX 200 back over 6,000 points

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited and Telstra Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The upcoming profit reporting season will keep investors on the edge of their seats and you shouldn’t forget to scrutinise one often overlooked detail in the results.

This is the cash conversion ratio, which most investors either do not know about or brush aside for earnings multiples and growth figures.

Don’t get me wrong, price-earnings (P/E) ratios and sales and earnings growth are still important details this time round, as they are for every reporting season.

Cash ratio as important as profit ratio

But the cash conversion ratio (CCR) is particularly relevant in this COVID-19-stricken market. You’ll see why after I explain what this ratio is.

The CCR measures the amount of cash a company collects as a percentage of earnings. Just because an ASX stock reports a $100 profit, it doesn’t mean it receives $100 in cash.

Calculating the CCR is easy although few companies will do it for you when highlighting their profit and sales performance for the year.

How to calculate the cash conversion ratio

To get the ratio, you take the net operating cash flow (from the cash flow statement) and divide that by the reported earnings before interest, tax, depreciation and amortisation (EBITDA).

Don’t get confused by the cash flow statement as it is broken into three sections – operations, investing and financing. Cash flow from operations reflects the cash a company gets from its ordinary business and what it pays to provide the service or products, and that’s the net figure you want.

Some calculate the CCR by dividing the cash flow with net profits instead. I prefer to use the EBITDA number as amortisation and depreciation charges do not impact on cash and it produces a “cleaner” ratio.

Why cash doesn’t match profit

In the vast majority of cases, you will find that the net cash from operations falls short of EBITDA. This shortfall can be significant too and will vary from sector to sector.

The general rule of thumb is that a company with a CCR of 80% or better is good. If the ratio falls below this, you should investigate why as it could be an early indication of a problem.

So why does a company’s reported EBITDA not match the cash it receives? There are a few reasons for this. It could be a timing issue where a company recognises the profit from a sale before it gets paid by the customer.

Another common reason is an expansion in the company’s working capital, perhaps to fund a build-up in inventory.

Early warning sign

That could be a bullish sign if management is expecting a big ramp up in near-term sales or is gearing up for the start of a big project.

But in this coronavirus recessionary environment, a material increase in working capital could be a warning sign instead as most businesses will be experiencing declining sales.

Further, many ASX companies are probably feeling a cash crunch from the COVID-19 fallout. Booking decent profits isn’t enough to stave-off a capital raising if the cash isn’t coming in fast enough.

Final thoughts

As I’ve written last week, capital raisings are one of the key features I am expecting during the reporting season. Paying attention to the CCR could provide an early clue of a company in need of fresh capital.

As a final thought, the CCR is more relevant to S&P/ASX 200 Index (Index:^AXJO) companies than small caps.

Market minnows often don’t have earnings and are still making losses. You can’t use the ratio if the EBIDTA number is negative.

More reading

• Should fixed-interest investments be part of your ASX share portfolio?
• These were the worst performing ASX 200 shares last week
• ASX 200 drops more than 1%, IAG falls 7.5%
• Escalating US-China tensions are sending these ASX stocks jumping higher today
• Brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

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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It’s the age-old question: should I be investing in super?

The Aussie superannuation system can be divisive. Many, particularly the younger cohort, are reluctant to invest additional cash into their super funds.

However, I’m a big believer in the power that super funds can have to turbocharge retirement plans.

Here are a few reasons why investing more money in super can be a great idea for investors of all ages.

Concessional contributions are taxed at 15%

This is a really big factor in favour of investing in super. Concessional contributions up to $25,000 per year are taxed at just 15% by super funds.

For reference, every dollar earned between $18,200 and $37,000 is taxed at 19%. Beyond that, Aussies are taxed progressively at 32.5%, 37% and up to 45% per dollar above $180,000 per year.

That means investing in super as concessional contributions can generate a significant tax break. As a long-term investor myself, that seems like a no-brainer.

I plan on using that money at 65+ anyway, so I might as well save some tax along the way.

Investing in super means less tax on capital gains

This is another big consideration but one that is often overlooked.

A capital gains event generally occurs when an asset is sold. If that is outside of super and the asset has been held for over 12 months, the investor would get taxed at their marginal tax rate.

However, capital gains within super get another handy tax break. During the accumulation phase, super funds typically receive a one-third discount on any capital gains made.

Given super funds are taxed at the flat 15% rate, that means the capital gain would be taxed at effectively 10%.

That’s compared to anywhere between 19% to 45% for investing outside of super if you earn upwards of $18,200 per year.

Super funds can invest big and long-term

Super funds have large pools of capital to invest across their various strategies. That means investing in super can get you access to investments that would otherwise not be possible.

This includes allocations to private equity, hedge funds and infrastructure assets. These investments can generate liquidity premiums and boost overall returns.

Investing in super is just one part of your strategy

The good news is, it doesn’t have to be all or nothing when it comes to investing in your superannuation. You can still keep your investments outside of super, but you may need less of them.

For instance, you could build up a sizeable portfolio of ASX shares or hold a broad market ETF like BetaShares Australia 200 ETF (ASX: A200) alongside your growing superannuation fund.

If you retire early, you simply draw down your ETF holdings outside of super down to zero until preservation age.

From there, your super investment kicks in and you can have a happy retirement.

But… there are drawbacks

Of course, if it was all good news, everyone would be investing more in super with no questions asked.

The reality is that there is an opportunity cost of contributing more to your superannuation.

That money is locked away for a long time and could be otherwise deployed elsewhere. For instance, you could buy ASX shares outside of super, pay down debt or save for a home deposit.

The First Home Super Saver (FHSS) scheme does help to alleviate this in some sense, but not completely.

There’s also a significant regulatory risk. Many investors worry that the preservation age will change by the time they retire.

The government could also view super as a convenient way to pay back deficits through higher taxes.

Foolish takeaway

In the end, investing additional money in super is a personal choice. However, I think the benefits outweigh the potential risks for me as it currently stands.

More reading

• Are you ready to invest in ASX shares?
• Is the ANZ, APA or CSL share price a strong buy?

Motley Fool contributor Ken Hall 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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At present the interest rates on offer with term deposits are at ultra low levels and struggling to keep up with inflation.

In light of this, I suspect many income investors will be looking for suitable alternatives.

But where can you turn? I think that ASX dividend shares could be the best way to replace your term deposit if you’re after reliable source of income. Especially given the generous yields on offer with many dividend shares right now.

Three ASX dividend shares that I would buy are listed below. Here’s why I like them:

Aventus Group (ASX: AVN)

The first ASX dividend share I would suggest investors look at is Aventus. Although retail property companies are having a very difficult time during the pandemic, I’m optimistic that Aventus will be less impacted than others. This is because it specialises in large format retail parks and has a total of 20 centres across Australia. Its tenancies have a high weighting towards everyday needs and host high quality retailers such as ALDI, Bunnings, Officeworks, and The Good Guys. I believe this leaves it better positioned than most to ride out the storm. As a result, I estimate that Aventus shares could provide investors with a dividend yield of over 6% for FY 2021.

Dicker Data Ltd (ASX: DDR)

Another dividend share to consider buying is Dicker Data. It is a wholesale distributor of computer hardware and software across the ANZ region. Dicker Data has been a strong performer in FY 2020 and reported stellar growth during its recently completed first half, The company reported half year revenue above $1 billion for the first time and a 30.4% lift in net profit before tax to $42 million. In light of this, the company is on course to increase its dividend by 31% to 35.5 cents per share this year. Based on the current Dicker Data share price, this represents a generous fully franked 4.8% dividend yield.

Telstra Corporation Ltd (ASX: TLS)

A final ASX dividend share to consider buying is this telco giant. I think Telstra is one of the best dividend shares to buy on the ASX right now due to its defensive qualities and positive medium term outlook. Those defensive qualities have been on display for all to see this year. For example, at the height of the pandemic, Telstra was able to reaffirm its guidance for FY 2020. Importantly, this includes its free cash flow guidance for FY 2020. As a result, it appears perfectly positioned to continue paying a 16 cents per share fully franked dividend this year. And looking further ahead, I believe this dividend is sustainable for the foreseeable future thanks to its cost cutting, productivity improvements, and price increases. Based on the current Telstra share price, this dividend equates to an attractive 4.8% yield.

More reading

• Fed up of dividend cancellations? Buy these safe ASX dividend shares
• 3 ASX shares to benefit from huge growth in streaming subscriptions during lockdown
• Buy NAB and this ASX dividend share for income
• How are 2019’s tech IPOs performing?
• ASX 200 rises 0.3%, investors bet on Tabcorp

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and Telstra Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT. 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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Last week saw a large 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:

Australia and New Zealand Banking GrpLtd (ASX: ANZ)

According to a note out of Citi, its analysts have retained their buy rating and $24.75 price target on this banking giant’s shares. While the broker believes that the recent spike in coronavirus cases could mean further loan deferments, it isn’t enough to shift its positive view on the investment opportunity with ANZ’s shares. It continues to see value in its shares at the current level. I agree with Citi on ANZ and would be a buyer of them.

Coca-Cola Amatil Ltd (ASX: CCL)

Another note out of Citi reveals that its analysts have retained their buy rating and $9.85 price target on this beverage company’s shares. This follows the release of a trading update by Coca-Cola Amatil last week. It appears pleased with the volume recovery in the ANZ market and suspects volumes could surprise to the upside in the near term. And while it notes that its Indonesian business continues to struggle and has taken an impairment charge, it wasn’t overly surprised by this. While I’m not a huge fan of the company, I do think it could be worth a closer look.

Tabcorp Holdings Limited (ASX: TAH)

Analysts at UBS have retained their buy rating and lifted the price target on this gambling company’s shares to $5.00. According to the note, the broker’s research has shown a material increase in digital betting during the pandemic. Its analysts believe that Tabcorp has won a bit of market share thanks to its promotions. It feels this will offset some of the weakness it is experiencing in other parts of the business. Once again, it’s not a share that I’m naturally drawn to, but it could be worth considering.

More reading

• Buffett buys more bank shares: Should you?
• Why UBS thinks now is the time to be buying this underperforming ASX 200 stock
• Will the iron ore price crash by the end of 2020?
• Tabcorp share price up 5% as CEO and chair succession plan announced
• ASX 200 rises 0.3%, investors bet on Tabcorp

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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