The ASX energy sector is on a tear since the oil price bounced from its unprecedented meltdown, but the bears might be ready to pounce again.

In case you forgot, the WTI crude benchmark crashed into negative territory for the first time in history on April 20 before rebounding to US$35 a barrel while the Brent nearly doubled since bottoming to US$38 a barrel.

The turnaround sent the Oil Search Limited (ASX: OSH) share price jumping 27% and the Santos Ltd (ASX: STO) share price climbing 25% over the period.

These stocks are more leveraged to the oil price and explains why the Woodside Petroleum Limited (ASX: WPL) share price is trailing with “only” a 9% gain. But that’s still miles ahead of than the 5% increase in the S&P/ASX 200 Index (Index:^AXJO).

More production cuts to support market

However, the party for our energy producers may not last. Experts are casting doubt on the sustainability of the oil price rally even as OPEC and Russia (OPEC+) moved forward their meeting by a week to this Thursday.

There’s speculation that the oil producing bloc will extend the supply cuts that triggered the recovery and moved their next meeting forward to speed things along.

But Australia and New Zealand Banking GrpLtd’s (ASX: ANZ) commodities strategist Daniel Hynes told the Australian Financial Review that this could be a bearish sign instead.

Oil party pooper

OPEC+’s eagerness to bring forward their meeting and keep production quotas in place signify that demand for crude isn’t recovering at the same pace as prices.

Demand for oil plummeted due to the COVID-19 shutdown of the global economy. While the gradual reopening of some countries is lifting demand for fuel, the recovery is patchy, especially as air travel remains off the cards.

The widespread racial riots in the US sparked by the death of George Floyd is also hurting demand for the commodity.

US drivers in a jam

The US summer driving holiday season looks over before it began with Hynes saying that demand was down 25% to 30% over the Memorial Day holiday on May 25, which usually kicks off the season.

“The US driver consumes about 10% of the world’s oil. So, it’s an important sector,” he told the AFR. “Any data highlighting how it’s going will be focused on.”

Foolish takeaway

While oil market looks prone to a pullback, or even a correction, its unlikely that we will see oil turn negative again.

As I wrote back then, that was probably the only occasion time in our lifetime that we will witness such an event.

This means the worst for the market is likely behind us, although the volatility means investors will need to reasonably strong stomach if they wanted to invest in ASX oil-exposed stocks.

More reading

• 2 ASX 200 shares to watch on Tuesday
• How to value the big four ASX banks
• Where to invest $5,000 into ASX 200 shares immediately
• 3 ASX 200 resources shares to buy today
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited. 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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ASX 200 shares had a strong start to the week as the S&P/ASX 200 Index (ASX: XJO) jumped 1.10% higher on Monday.

The Resources sector led the benchmark index higher yesterday thanks to strong commodity prices. However, there were more mixed performances across other industries as the market volatility continued.

Find out which ASX 200 shares I’m watching during today’s trade.

2 ASX 200 shares to watch on Tuesday

The BHP Group Ltd (ASX: BHP) share price is one I’m keeping my eye on today. Shares in the Aussie miner jumped 3.09% on Monday thanks to strong iron ore prices, although it has opened today down by 1.68%.

At the time of writing, BHP is worth a whopping $169.1 billion and is the largest ASX 200 share by market capitalisation right now.

Investors could continue to back the Aussie miner in 2020, but I still think its a speculative buy right now with so much uncertainty around trade.

However, there are some tailwinds in the market right now which could push the BHP share price higher. Momentum could be a big factor and I think BHP is one ASX 200 share worth watching today.

Other than BHP, Wesfarmers Ltd (ASX: WES) could be moving. Wesfarmers is an interesting business in a unique position right now.

The Aussie conglomerate is sitting on a pile of cash after selling part of its stake in Coles Group Ltd (ASX: COL) for $1.1 billion. However, it’s not all good news for the ASX 200 share right now.

The group is currently restructuring its retail arm, Kmart Group. In fact, Wesfarmers recently announced the closure of 75 Target stores as sales continue to slump.

Despite opening slightly down this morning, the Wesfarmers share price has still climbed nearly 8% higher this year and is worth keeping on a watchlist. A strong balance sheet is a big plus and provides flexibility to buy more portfolio companies if the right opportunity arises.

Foolish takeaway

There are always many ASX 200 shares worth watching. These are just a couple of the large-caps that I’m keeping an eye during another big day of trade.

More reading

• The big oil price recovery and bounce in ASX oil stocks are bringing out the bears
• 3 ASX shares to buy and hold for the next 2 decades
• Where to invest $5,000 into ASX 200 shares immediately
• 3 ASX 200 resources shares to buy today
• 3 strong ASX dividend shares to buy right now

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. 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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There aren’t too many ASX shares that I’d feel comfortable about buying and committing to owning for two decades.

But there are a few that I think could be solid ultra-long-term picks. They have shown their worth in the coronavirus so far. 

Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)

Soul Patts could be one of the best ASX shares to invest for the long-term in. Only an exchange-traded fund (ETF) may have a better claim.

It has already been listed on the ASX for over a century, so it clearly has great longevity. But I don’t think it’s on the cusp of irrelevance at all. It’s an investment conglomerate so it can change its investment holdings as time goes on. Soul Patts is apparently about to start investing in regional data centres, a big growth area right now. Current large investments include telecommunications, building products and resources. 

Of the current shares in the ASX 200, I think Soul Patts could be among the group that will operate for the longest time into the future.

The management team of Soul Patts themselves invest for the long-term within the company. So it has long-term characteristics. It is steadily increasing its dividend, which is another attractive future.

Xero Limited (ASX: XRO)

There are only two things certain in life (as the saying goes). Death and taxes. You can’t do a business tax return without tracking your income, expenses, assets and liabilities, then making financial statements. So why wouldn’t you want to use the best tools available?

Xero is an ASX share that provides cloud accounting software and it’s resonating with clients across the world.

It’s no surprise that Xero has a strong market share in New Zealand and Australia as it’s a local business with a great service. But it’s also growing at an extraordinary rate in the UK and doing well in other areas of the world.

Xero generates attractive monthly cashflow at a very high gross profit margin. At the moment Xero is investing heavily for growth and it’s paying off. In two decades (or just one) it could be one of two clear market leader providers in the world.

Wesfarmers Ltd (ASX: WES)

Wesfarmers isn’t normally an ASX share I’d suggest is one of the best dividend shares, or one of the best growth shares. But I think it’s a great blue chip.

It isn’t stuck being a bank or a miner. It will happily adjust what operating businesses it owns over time. Remember that it acquired and years later divested Coles Group Limited (ASX: COL). Wesfarmers isn’t afraid to make big, bold moves. Even if they don’t work out – look what happened to Bunnings UK and Ireland.

The point is that Wesfarmers can acquire businesses to position it for future success. For example, it recently acquired a lithium miner and it also acquired online retailer Catch Group.

Of course, its current businesses are also fantastic. Bunnings may be the best retail businesses in the country.

Foolish takeaway

I think all of these ASX shares would make very good ultra-long-term investments at the current prices. Xero may be able to generate the most growth if it keeps adding subscribers, but I prefer Soul Patts for its diversification.

More reading

• 2 ASX 200 shares to watch on Tuesday
• 3 strong ASX dividend shares to buy right now
• Buy these ASX growth shares for monster returns
• Why Woolworths shares are offering a rare buying opportunity today
• These ASX shares are set to get a big boost from the next big government stimulus

The post 3 ASX shares to buy and hold for the next 2 decades appeared first on Motley Fool Australia.

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Yesterday, I explored how some of the current issues facing the ASX banks could be impacting their ‘bankability’. But to understand how banks are valued in the first place, you need to recognise how they differ from other type of stocks. For example, unlike regular industrial stocks, banks make money from borrowing, lending and aiding the flow of money throughout the economy. This makes them highly vulnerable to the economic cycle, and as an investor you need to know when they’re out of the money.

You need to tread carefully when using a price-to-earnings ratio (P/E) and dividend yield to gauge how attractive ASX bank shares might be. That’s because bad debts or one-off items can compromise the sustainability of bank dividends, as shareholders discovered in 2007 when they were slashed to help prop up badly needed bank capital.

It’s also important to understand that banks require some peculiar evaluation criteria when it comes to assessing their intrinsic value and business performance. If you do want to use the P/E ratio to help value and compare one bank share against another, then it must be used alongside some bank-specific financial ratios.

While some valuation principles are equally applicable to all companies, there are a number of complications specific to banks. These include determining leverage – due to being both borrower and lender – regulatory impact, capital expenditure and interest margins.

Key ratios

Net interest margin (NIM): A bank’s primary income source is the difference between the interest income from its loan book, and interest paid out to depositors. Typically expressed as a percentage of the average loans outstanding over the period under review, this is known as the ‘net interest margin’ (NIM). A high ratio indicates bank efficiency. While you won’t find it in official financial statements, most banks disclose this average somewhere near the front of their detailed annual reports.

Cost to income ratio: Measures a bank’s operating expenses as a percentage of its total income. The lower the ratio, the better the bank is at controlling costs and most brokers prefer banks with a cost to income ratio of less than 50%.

Bad debts ratio: Measures a bank’s provisioning for when a client can’t meet their repayments and a debt goes bad. The higher the number of bad loans, the higher you really want the net interest margin to be, otherwise it could wipe out a hefty chunk of profit.

Return on assets: As a useful efficiency measure for banks, ROA indicates how profitable a bank is relative to its total assets. Calculated by dividing annual earnings by its total assets, ROA is displayed as a percentage – the higher the better – and should reveal how competent management is at using its assets, like mortgages to generate earnings.

Tier 1 capital ratio: Is a litmus test of a bank’s capital strength. It’s arrived at by isolating the amount of ‘tier 1 capital’ – the highest quality capital – then identifying the proportion of ‘risk-weighted assets’. Capital ratios in the big four and Macquarie range between 10.8% and 12.2%.

Price to book ratio: Is the value you would see if the business was liquidated and liabilities paid out. A ratio of 1 indicates shareholders can only expect a return of book value. A ratio above 1 indicates the extent to which shareholders are potentially exposed to market risk.

Standout ASX bank shares to buy now

Based on its forecasted pre-provision operating profit per share growth over the next 3 years, Goldman Sachs’ preferred major bank exposure is National Australia Bank Ltd (ASX: NAB). It expects NAB’s revenue momentum to remain superior to its peers, driven by its overweight exposure to SME lending. While NAB has taken the lowest provision for bad debts, at 0.38%, its credit impairment charge as a percentage of loans is also considerably lower than its peers.

At a share price of $17.95, the bank is still trading 40% down on its 52-week high of $30.00. Goldman Sachs also reiterates a buy on Australia and New Zealand GrpLtd (ASX: ANZ) shares, which at $18.05 are still trading 38% down on their 52-week high of A$29.30.

Based on its strong deposit franchise, Commonwealth Bank of Australia (ASX: CBA) is seen as more vulnerable to the medium-term impact of lower rates. The bank also has the highest exposure to more competitive mortgages relative to its peers. Based on a valuation that’s more expensive in relative and absolute terms, Goldman Sachs concludes that NAB and ANZ offer a more attractive entry point at current levels.

Similarly, while Westpac Banking Corp (ASX: WBC) has demonstrated better expense control, stronger margins, and better than expected housing growth, the stock is not regarded as a buy. This is due to risk of higher investment spend, plus the risk of elevated fines and asset quality deterioration. At $17.36, Westpac shares are trading at a 42% discount to its 52-week high of $30.05.

Market uncertainty over banks’ fortunes is reflected in buy, hold and sell consensus broker recommendations on ANZ, NAB and Westpac. However, brokers unanimously agree that Commonwealth Bank is not a buy, with 12 out of 15 seeing it as a strong sell.

Despite the recent rally, bank share prices still suffer from a negative sentiment overhang that pre-dates COVID-19. Yet if the GFC is any proxy, the post-crisis period bodes well for the sector.

More reading

• The big oil price recovery and bounce in ASX oil stocks are bringing out the bears
• 5 things to watch on the ASX 200 on Tuesday
• I don’t normally buy ETFs, but I would buy these 2
• Where to invest $10,000 into ASX shares immediately
• How bankable are the big four ASX bank shares in 2020?

Motley Fool contributor Mark Story 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.

The post How to value the big four ASX banks appeared first on Motley Fool Australia.

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In the wake of COVID-19, supply chains are already moving to become more local. For instance, there were acute shortages in healthcare, car parts and construction. In South Korea, Hyundai closed its plants due to a lack of car parts. Moreover, we all felt the impacts of a lack of hand sanitiser and face masks in the early days. 

When we talk about Australian manufacturers, thoughts go immediately to PPE manufacturer Ansell Limited (ASX: ANN) or shipbuilder Austal Limited (ASX: ASB). Yet there are several smaller companies selling at share prices I believe are below their intrinsic value.

Local supply chain manufacturing

Reliance Worldwide Corporation Ltd (ASX: RWC) manufactures and sells plumbing accessories – a core product in the residential and commercial supply chains. Over the past 4 years since its initial public offering (IPO), the company has grown its sales by an average of 46.5%. At the same time, it is continually improving its net profits.

Reliance has been acquiring companies to provide a comprehensive product offering. In addition, it operates in Australia, the UK and the US, providing exposure to the US housing market. The Reliance share price is selling at a price-to-earnings ratio of 20.51. This is well below the company’s 10 year P/E average and I believe Reliance is currently selling at a discount to its intrinsic value.

Orora Ltd (ASX: ORA) manufactures packaging products. This includes bottles, boxes, cartons and aluminium cans. It operates in Australia and the US. Over the 6 years since its IPO, Orora has an average return on capital employed (ROCE) of 11%. This is a measure of how well the company can transform available capital into earnings. As companies move to localise supply chains, Orora is likely to see increased sales. 

This share has a one-off payment this year after the sale of one of its business. When combined with the dividend payment, this share pays a 18.8% yield (based on last Friday’s share price). However, it must be purchased before the ex-dividend date of 19 June. 

High tech manufacturing

Of the 3 companies, Electro Optic Systems Hldg Ltd (ASX: EOS) is the smallest. It manufactures components for the defence and space sectors. Sales for this company have doubled for the past 2 years. It has recently completed the acquisition of Audacy Corporation, a US satellite communications company, which will provide the manufacturer with greater product diversity. Electro Optic provides high technology solutions, including the space situational awareness network in conjunction with the United States.

The SpaceX launch over the weekend, combined with the recent Space Force announcement in the US and increases in defence spending, will likely see an increase in sales for this ASX mid cap. These are considered security critical areas. In my opinion, it would be a mistake to leave these areas in any concentrated and offshore manner, given the lessons from COVID-19. 

More reading

• SpaceX creates new era for this mid-cap ASX share
• These 5 ASX 200 shares were last week’s biggest winners
• Leading brokers name 3 ASX 200 shares to buy right now
• Real wealth from 3 roaring mid caps in May
• Why Austal, CSL, Fortescue, & Star shares are charging higher today

Daryl Mather owns shares of Austal Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited and Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Ansell Ltd. and Reliance Worldwide 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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This afternoon the Reserve Bank will make a decision on the cash rate. While there is speculation that rates could go to zero today, I’m not overly convinced this will be the case.

However, what I am convinced about, is that rates will remain at ultra low levels for a long time to come.

In light of this, if I had $5,000 in a savings account and no immediate use for it, I would invest it into the share market.

Three top ASX 200 shares I would buy right now with these funds are named below:

Appen Ltd (ASX: APX)

Appen is a leading developer of high-quality, human annotated datasets for machine learning and artificial intelligence (AI). It has a team of over one million crowd-sourced experts preparing the data for the models of some of the world’s biggest tech companies. This is a vital part of the process and demand for its services is growing very strongly. And given the importance of AI and machine learning for big business, I expect this to be the case for a long time to come. In light of this, I believe Appen is well-placed to deliver strong earnings growth over the next decade.

Aristocrat Leisure Limited (ASX: ALL)

The Aristocrat Leisure share price has fallen heavily this year because of the pandemic. While its performance has inevitably been impacted by the crisis, I believe the selloff has been overdone. Especially given how I expect the gaming technology company to bounce back strongly when the crisis passes. This is due to its industry-leading poker machines and its growing digital business. The latter is experiencing very favourable tailwinds right now and is generating material recurring revenues.

Bravura Solutions Ltd (ASX: BVS)

Bravura Solutions is a growing financial technology company which offers a range of solutions to the wealth management and funds administration industries. While the company has a number of products in its portfolio, I’m most positive on the Sonata wealth management platform. This next generation wealth management platform has been a key driver of Bravura Solutions’ growth over the last few years. The good news is that I expect more of the same in the future thanks to it sizeable market opportunity.

More reading

• 3 ASX 200 resources shares to buy today
• 5 things to watch on the ASX 200 on Tuesday
• 3 ASX 200 tech shares to buy and hold beyond 2025
• Why Woolworths shares are offering a rare buying opportunity today
• In your 50s? Here are the 2 best ASX 200 shares to buy now

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 Bravura Solutions Ltd. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Bravura Solutions 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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