On Tuesday evening, the Treasurer Josh Frydenberg discussed the impact of COVID-19 on the economy with the economics editor from The Australian. In this conversation, Frydenberg stated that we are definitely in a recession. Not only that, but this time, an Australian recession will be worse than it was in 1991. I had just entered the workforce prior to the 1991 recession, and an experience like that is not something that you easily forget.

If this is where we are headed once the smoke clears from the coronavirus pandemic, then I think it would be wise to structure your portfolio accordingly. This is something I have been contemplating for a few weeks now. Some businesses will flourish and grow, others will stagnate, and yet others will come under very extreme cost pressures. 

In particular, companies and people will be looking to increase the amount of capital on hand. 

Cashflow in an Australian recession

Companies with lumpy, milestone-based revenue streams can find themselves living off cash in hand for an extended period of time. For instance, companies like engineering firms, consultants, project managers and construction/maintenance contractors. 

In the event of an Australian recession, this effect worsens. For instance, the overall amount of work may go down, or the time between invoice and payment may extend, leaving the service provider more reliant on fewer milestone payments.

With the importance of cashflow in mind, here are 2 ASX shares that could find themselves in great demand if we move further into a recession.

CML Group Ltd (ASX: CGR)

CML Group is a small cap designed for hard times. The company specialises in short term credit for small and medium enterprises. CML’s main generator of revenue is what’s known as invoice factoring, which is a mechanism companies can use to smooth out payments. An invoice factoring company pays the invoice for you, minus a fee, and then takes payment when the client company pays. In some cases the factoring company will collect the payment directly from the client. This is a simplistic explanation, but you get the general idea.

CML recently reported strong monthly growth in volumes as business restrictions eased. In 2020, even with the COVID-19 total lockdown, the company financed over $1.7 billion in invoices compared with $1.6 billion for FY19.

Moreover, it has a 9 year average return on equity (ROE) of ~15%. This means for every dollar of net assets the company has, they earn 15c. I think this is a good level and shows the company has high margins.

CML Group also provides 2 other credit mechanisms businesses may need in an Australian recession. First, asset finance, either secured against current machinery or to purchase new machinery. Second, trade finance. This allows businesses to import products from overseas without having to spend their own working capital.

Sezzle Inc (ASX: SZL)

In hard times, people are generally less likely to make long-term credit commitments. In fact, they tend to cut back spending in a whole range of areas. Buy now, pay later (BNPL) companies are the latest iteration of short-term credit providers. The business model charges merchants instead of consumers. Consequently, it is a more attractive method for products and, increasingly, for services. 

Operating within Australia, the 2 major market players are Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P). However, I have always preferred Sezzle Inc, a company I own shares in.

Sezzle is headquartered in the United States, operating directly in the US$5.4 trillion dollar retail market. The company announced earlier this week that it now has a network of 1.48 million users and 16.1 thousand merchants.

This is useful for 2 reasons. First, I believe the company remains undervalued and has a long growth trajectory ahead of it. Second, the US population is ~13 times larger than Australia. Therefore, no matter how bad the economy is in the US, there will always be a greater number of people who can spend money as opposed to an Australian recession. 

The risk here is that of unsecured debt. When times get tough unsecured debts are often the first to be jettisoned. However, in the case of Sezzle there are light credit checks in place, and the timeframe for repayments is very small. Consequently, I think this lessens the chance of a high defaults levels.

Foolish takeaway

When the hard times come people act differently. Individuals become less secure in their employment, while companies try to ensure they maximise capital on hand. The 2 companies above help to manage cashflow, while keeping debt commitments to a short term horizon.

I think companies like these will flourish in an Australian recession, and I am carefully considering adding CML Group to my own portfolio.

More reading

• Why Afterpay, Evolution, Netwealth, & Praemium shares are racing higher
• 3 dependable, blue chip ASX shares for uncertain times
• Leading broker says Afterpay share price can hit $101
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 drops 1.5% today, Afterpay falls 3%

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. 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 2 ASX shares that could flourish in an Australian recession appeared first on Motley Fool Australia.

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The S&P/ASX 200 Index (ASX: XJO) has returned to form on Thursday and is charging notably higher in late morning trade. At the time of writing the benchmark index is up 0.7% to 5,962.7 points.

Four shares that are climbing more than most today are listed below. Here’s why they are racing higher:

The Afterpay Ltd (ASX: APT) share price is up 5.5% to $69.65. Investors have been buying the payments company’s shares following the release of a bullish broker note out of Morgan Stanley. According to the note, the broker has upgraded Afterpay’s shares to a buy rating and lifted its price target on them from $36.00 to $101.00. It is pleased with its better than expected credit quality control performance and sales growth acceleration. It also sees opportunities for M&A activity following its capital raising.

The Evolution Mining Ltd (ASX: EVN) share price has risen 4% to $6.29. The catalyst for this has been another rise in the gold price overnight. The price of the precious metal hit a nine-year high following increasing demand for safe haven assets. It isn’t just Evolution on the rise today, the S&P/ASX All Ordinaries Gold index is up a sizeable 2.5% at the time of writing.

The Netwealth Group Ltd (ASX: NWL) share price has jumped 6% to $9.82. This follows the release of the investment platform provider’s latest quarterly update. According to the release, Netwealth’s funds under administration (FUA) stood at $31.5 billion at the end of the fourth quarter. This means the company grew its FUA by $8.2 billion or 35% during the financial year. This includes a negative market movement of $0.9 billion for the year.

The Praemium Ltd (ASX: PPS) share price has rocketed 15% higher to 42.5 cents. Investors have been buying this investment platform provider’s shares after it announced the friendly takeover of Powerwrap Ltd (ASX: PWL). Praemium has offered 7.5 cents cash per Powerwrap share and 1 Praemium share for every 2 Powerwrap shares held. This values Powerwrap at $55.6 million or 26.44 cents per share, which represents a 51.1% premium to its last close price. The Powerwrap board has urged shareholders to accept the offer, in the absence of a superior proposal.

More reading

• 2 ASX shares that could flourish in an Australian recession
• 3 dependable, blue chip ASX shares for uncertain times
• Praemium share price rockets after agreeing $55.6 million Powerwrap takeover
• Gold jumps to 9-year high with record highs in sight
• Leading broker says Afterpay share price can hit $101

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 Praemium Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Netwealth. The Motley Fool Australia has recommended Praemium 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 Commonwealth Bank of Australia (ASX: CBA) share price has risen by more than 30% in the past couple of months after the heavy sell-off through February and March, which saw Commonwealth Bank shares lose almost 40% of their value.

The Commonwealth Bank share price recovery has been strong, steadily clawing back from its low of $54.26 on 23 March to reach a price above $70 at the time of writing. While CommBank shares are still some way off their pre-COVID-19 price, the share price is still above what it was in late March last year.

Lending landscape

CommBank recently announced it was offering customers who could not meet their loan repayments an extra four months. While it is good that the banks at large are extending support for retail and business customers, it may actually also benefit them in the long run by prolonging the repayment period, meaning more interest income over the lifetime of the loan.

The borrowing rates of the big four banks have also fallen this year, as the RBA cut the cash rate by a further 50 basis points and has held the official cash rate steady at a record low of 0.25%. This means CommBank and its peers have sufficient access to capital to keep lending.

Dividend payments

Commonwealth Bank is one of the most popular dividend paying stocks on the ASX. With shares currently trading at $70.66, the trailing fully franked dividend yield for CommBank shares is 6.11%, which grosses up to 8.73% when franking credits are taken into account.

Earlier in the year, CommBank maintained it would not only be sustaining its interim dividend, but also offering a dividend payout ratio above its target. Coming into the pandemic, CommBank boasted the strongest balance sheets of the big banks, thus making it well prepared for COVID-19.

Despite this, analysts expect that the country’s largest bank will need to cut its full year dividend. Commonwealth Bank is being forecast to pay total dividends of $3.50 for the financial year ending 30 June 2020. This is a 19% decrease on it its payout in FY2019 of $4.31. The bank is expected to decrease dividend payments even further to $2.65 in FY2021.

Foolish takeaway

The Commonwealth Bank share price has been moving steadily higher in recent times to regain much of what it lost, however there are still plenty of headwinds facing the economy. Heavy government stimulus is expected to end come September and this will provide a clearer view of the current economic state. All eyes will be on Commonwealth Bank come 12 August as the bank releases its full year results.

More reading

• ASX investors have been buying these 5 international shares
• ASX 200 down 0.5%: Afterpay completes placement, big four banks tumble
• AFG share price flat despite revealing 30% increase in lodgements
• Why the CBA share price is worth watching this quarter
• These ASX shares are swept up by the new Victorian COVID-19 lockdown

Motley Fool contributor Daniel Ewing 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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In late morning trade the S&P/ASX 200 Index (ASX: XJO) has rebounded from yesterday’s decline and is on course to record a solid gain. At the time of writing the benchmark index is up 0.75% to 5,965.5 points.

Four shares that have failed to follow the market higher today are listed below. Here’s why they are dropping lower:

The GWA Group Ltd (ASX: GWA) share price is down 3% to $2.57. This appears to have been driven by a broker note out of the Macquarie equities desk this morning. According to the note, the broker has retained its neutral rating but slashed the price target on the household products company’s shares to $2.90. It made the move after adjusting its estimates to reflect current housing activity.

The Meridian Energy Ltd (ASX: MEZ) share price has sunk 9% lower to $4.45. Investors have been selling the renewable energy company’s shares after Rio Tinto Limited (ASX: RIO) gave notice that it will be winding down the Tiwai Point Aluminium Smelter. As a result, the mining giant will be terminating its contract with Meridian Energy on 31 August 2021.

The Treasury Wine Estates Ltd (ASX: TWE) share price is down 2.5% to $11.02. This morning the wine giant provided the market with an update on its performance in FY 2020. Management advised that it expects its earnings before interest, tax and the agricultural accounting standard SGARA (EBITS) to be between $530 million and $540 million in FY 2020. This will be an 18.5% to 20% decline on FY 2019’s EBITS of $662.7 million. This reflects the impact of the COVID-19 pandemic, which has had a significant impact on its trading performance across all geographies throughout the second half.

The WiseTech Global Ltd (ASX: WTC) share price has fallen 2% to $21.13. Investors have been selling the logistics solutions company’s shares after analysts at Ord Minnett downgraded them to a lighten rating with a $19.60 price target. The broker believes the market is expecting too much from WiseTech in FY 2021 and expects it to fall short of consensus estimates.

More reading

• Treasury Wine share price on watch on FY 2020 earnings update
• The WiseTech share price is up 15% in a week. Too late to buy?
• Here’s how to play China’s V-shaped growth story
• Why Lovisa, PointsBet, Transurban, & WiseTech shares are racing higher
• What’s next for WAAAX shares?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool Australia owns shares of WiseTech Global. 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 Why GWA, Meridian Energy, Treasury Wine, & WiseTech Global are dropping lower appeared first on Motley Fool Australia.

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The resurgence of coronavirus in Victoria has investors once again taking stock of potential economic impacts of the pandemic. When it comes to investing, and the outlook is particularly uncertain, it can often pay to consider life’s necessities. These are the products and services we will always need. Basic human needs for food, shelter, and internet access must continue to be met regardless of the economic climate. 

Defensive, blue chip ASX shares often cater to these needs. This makes them resistant to economic downturns. Companies in the consumer staples, healthcare, utilities, and telecoms sectors are somewhat insulated from economic fluctuations. Consumers may switch to cheaper options, but they can’t go without them altogether. On that note, let’s take a look at 3 dependable, blue chip shares to consider adding to your portfolio for these uncertain times. 

3 blue chip shares to buy during uncertain times

Coles Group Ltd (ASX: COL)

The Coles share price proved resilient during the February/March market crash. This was perhaps not surprising given shelves were stripped bare at the time due to consumers stockpiling. The rush on groceries prompted by lockdowns pushed Coles’ group sales up 12.9% in the third quarter giving total revenue of $9.2 billion.  

Coles operates 2,500 retail outlets nationally, including 800 supermarkets, 900 liquor stores, and more than 700 fuel and convenience retailers (Coles Express). Supermarket sales increased by 13.1% in the March quarter, giving the division its 50th consecutive quarter of comparable sales growth. Liquor sales were up by 7.2% and Express sales up 4.3%. 

Wesfarmers Ltd (ASX: WES)

The Wesfarmers share price has recovered strongly from the market downturn. Wesfarmers is the company behind Bunnings, Kmart, Target, Officeworks and the online superstore Catch. It’s also the former parent company of Coles but after a series of selloffs, now only retains 4.9% of the supermarket chain. Both Bunnings and Officeworks recorded significant sales growth in the second half to early June. Bunnings sales were up 19.2% and Officeworks sales were up 27.8%. 

Lockdown restrictions have resulted in vast numbers of Australians spending increased time living and working at home. Consequently, many have sought to improve their surrounds. This has led to a surge in DIY projects and home office upgrades. Whilst Kmart and Target have struggled during the pandemic, recent easing of restrictions have resulted in improving sales momentum from around early June as customer footfall in shopping centres increased. 

Woolworths Group Ltd (ASX: WOW)

Woolworths is the larger of the two major supermarket chains, operating 995 supermarkets across Australia. Including its liquor and Big W brands, Woolworths is behind some 3,000 stores across the country. The Woolworths share price has also proven fairly resilient, but has not recovered as strongly as the Coles share price since the March bear market. 

Woolworths reported a 10.7% increase in total, third quarter sales. The Australian food business saw growth of 11.3%, Big W increased sales by 9.5%, and liquor sales rose 9.5%. The hotels business saw a 12.9% drop in sales due to the closure of venues. Sales growth continued in April although moderated from rates seen in March. 

Foolish takeaway

Whilst these ASX blue chip shares might not deliver the heady, short-term returns offered by the likes of Afterpay Ltd (ASX: APT), given we are facing such an uncertain economic outlook, I feel they represent solid, defensive additions to a diversified portfolio. 

More reading

• 2 ASX shares that could flourish in an Australian recession
• Why Afterpay, Evolution, Netwealth, & Praemium shares are racing higher
• Leading broker says Afterpay share price can hit $101
• 5 things to watch on the ASX 200 on Thursday
• ASX 200 drops 1.5% today, Afterpay falls 3%

Motley Fool contributor Kate O’Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO, COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths 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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