There are many exchange-traded funds (ETFs) on the ASX. Dozens and dozens, in fact. And many of them I would consider to be smart investments in June 2024. So picking the smartest ASX ETF to buy with $1,000 right now isn’t the easiest choice.

In my view, you can never go wrong with a simple index fund like the Vanguard Australian Shares Index ETF (ASX: VAS) or the iShares S&P 500 ETF (ASX: IVV).

I’ve also written extensively about my love of the VanEck Vectors Wide Moat ETF (ASX: MOAT), and I would happily recommend that fund to any investor who wants to aim for market-beating returns from here.

But after much thought, I would consider the BetaShares Global Cybersecurity ETF (ASX: HACK) the smartest ASX ETF to put $1,000 into right now.

Why? Well, there are two reasons.

Why is HACK the best ASX ETF to put $1,000 in today?

The first is this ETF’s nature.

As its name (and ticker code) suggests, this ETF invests in a portfolio of global companies that are all movers and shakers in the cybersecurity industry. Some of the fund’s top holdings include CrowdStrike Holdings, Broadcom, Palo Alto Networks and Zscaler.

This is arguably one of the most important industries in the world right now. In our modern world, every individual, business and government holds sensitive data that they need to protect from prying eyes.

When these data stores are breached, it can have catastrophic impacts on our personal lives and finances, for one. But when we are talking about a business or a government, the potential impacts can be catastrophic. Just ask Optus or Medibank Private Ltd (ASX: MPL).

Global cybersecurity threats will only increase as the world becomes ever more connected. As such, it is reasonable to assume that individuals, businesses, and governments will increasingly be prepared to spend top dollar to prevent these embarrassing and potentially disastrous data breaches.

If realised, this trend stands to benefit every single company in the ASX’s Betashares Global Cybersecurity ETF.

The numbers don’t lie

Secondly, there’s past performance to consider with this ASX ETF. We should never base a potential investment decision on its past performance, or assume that performance will simply continue into the future.

However, I believe that, in this case, the HACK ETF’s track record vindicates the growth trajectory of the cybersecurity sector that we just discussed.

As of 31 May, the Betashares Global Cybersecurity ETF has returned 18.23% over the past 12 months. That becomes an average of 12.13% per annum over the past three years, and stretches to 16.09% per annum over the past five.

Since this ASX ETF’s inception in August 2016, investors have bagged an average of 16.49% per annum.

Putting all of these factors together, I think that this ASX ETF is the smartest place to put $1,000 into this June and beyond.

The post The smartest ASX ETF to buy with $1,000 right now appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in VanEck Morningstar Wide Moat ETF and Vanguard Australian Shares Index ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Global Cybersecurity ETF, CrowdStrike, Palo Alto Networks, Zscaler, and iShares S&P 500 ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Broadcom. The Motley Fool Australia has positions in and has recommended BetaShares Global Cybersecurity ETF. The Motley Fool Australia has recommended CrowdStrike, VanEck Morningstar Wide Moat ETF, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

BHP Group Ltd (ASX: BHP) shares are falling on Wednesday morning.

At the time of writing, the mining giant’s shares are down over 1% to $42.85.

Why are BHP shares falling?

Today’s decline may have been driven by the release of the company’s decarbonisation update this morning.

According to the release, the Big Australian is on track to reduce its operational greenhouse gas (GHG) emissions (Scopes 1 and 2 from operated assets) by at least 30% by FY 2030 from FY 2020 levels.

But management isn’t resting on its laurels. It has a goal to achieve net zero operational GHG emissions by 2050.

It acknowledges that to succeed, its technology must advance rapidly. It also highlights that “the pathway to net zero will be non-linear” as it organically grows its business, and it is using its capital allocation framework to maximise the returns on its GHG emissions abatement.

To support its long-term goal of net zero Scope 3 emissions by 2050, management notes that it has made strong progress on its strategy in the areas of steelmaking and maritime decarbonisation via partnerships, trials, and pilots.

What’s been happening?

Management points out that its haul trucks are the largest user of diesel at BHP globally.

Its preferred pathway to eliminate diesel is via electrification. BHP feels that operational trials and collaborations to accelerate development are critical to success. The good news is that it is working with a number of major players such as Caterpillar Inc. (NYSE: CAT) and Komatsu to make this a reality.

A trial with Caterpillar starts this year and with Komatsu in 2026. If everything goes to plan, these technologies will then be deployed in 2028.

The Big Australian is also collaborating with steelmakers to reduce GHG emissions in steelmaking. It notes that it has nine partnerships, representing ~20% of global steel production, to help tackle long-term steel transition through the decades to come. Management said:

We are progressing a diverse project portfolio to larger scale; covering routes we believe have greatest potential to support decarbonisation from use of our products.

One way to achieve this could be with its electric smelting pilot facility. A pilot plant is targeted for 2027 with widespread commercial deployment targeted post-2030.

Another area the mining giant is targeting is shipping. It has a 2030 goal of a 40% emission intensity reduction of BHP-chartered shipping of BHP products from a 2008 baseline. After which, it is aiming for net zero for the GHG emissions from all shipping of BHP products by 2050. It commented:

We see significant potential in the trial and adoption of low to zero-emissions alternatives such as ammonia. A promising future fuel with potential to drive a step change reduction in GHG emissions on a per voyage basis compared to conventional fuel.

It’s fair to say that this is promising from BHP. However, one thing missing from the presentation is how much this all will cost. This uncertainty may be what is weighing on BHP shares today.

The post BHP shares fall on decarbonisation update appeared first on The Motley Fool Australia.

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• What’s the outlook for ASX 200 mining shares in FY25?
• Buy BHP and these ASX dividend shares

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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 Scott Phillips.

It certainly has been a tough week for the Cettire Ltd (ASX: CTT) share price.

Since the start of the week, the ASX tech stock has lost over 50% of its value.

Why has this ASX tech stock been sold off?

Investors have been selling off the online luxury products retailer’s shares in response to the release of a trading update.

Cettire warned that “the operating environment within global online luxury has become more challenging” with heightened levels of discounting.

In response to these difficult operating conditions, management “has selectively participated in the promotional activity, leading to an increase in marketing costs relative to sales and a decline in delivered margin percentage.”

This appears to have spooked investors, who may now believe that this marks an end of the ASX tech stock’s explosive sales and earnings growth.

Broker says buy the selloff

Analysts at Bell Potter were not overly impressed with Cettire’s trading update. Commenting on the update, the broker said:

Cettire (CTT) provided a FY24 trading update (Apr-Jun) and sales revenue of $735m745m (FY +78% on pcp and 4Q +54% on pcp) was broadly in line with BPe, however Adjusted EBITDA of $32-35m was a material miss to BPe/Consensus ($44m). We note that the current trading in the seasonally key 4Q has been impacted by the intense promo environment during the Northern Hemisphere Spring/Summer ’24 sales period from mid-May leading to challenging product margin outcomes (BPe ~32% for 2H24). The direct platform in mainland China was also launched ahead of the end of 4Q24.

While our topline assumptions remain largely unchanged, we see continuing pressure on 1H25 product margins in achieving a BPe ~26% net revenue growth for FY25e until the industry stock levels and promo intensity normalise over the coming months. We believe that the timing of recovery would be dependant on the ongoing industry consolidation at present given the exit of some players and overall consumer demand.

However, the broker appears to see the selloff that ensued as an overreaction.

Major upside potential

In response, Bell Potter has reaffirmed its buy rating but cut its price target by 35% to $2.60 (from $4.00).

Despite this valuation cut, it still suggests that the ASX tech stock could more than double in value from its current share price of $1.12.

Its analysts conclude:

Our PT decreases 35% to A$2.60 (prev. A$4.00) driven by our earnings revisions and a reduction to our target multiple (12x vs prev. 13.5x). Despite a weak trading update, CTT continues to perform relatively better than peers in the luxury industry and we believe that CTT’s ability to outperform far outweighs luxury e-comm peers. While the market consolidation continues across large to smaller players, CTT’s sub-1% market share and flexibility in the drop-ship inventory model highly supports growth. At our downgraded PT of $2.60, the TER is >100% so we maintain our BUY rating.

The post This smashed up ASX tech stock could rebound 100%+! appeared first on The Motley Fool Australia.

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• Why Cettire, Metcash, ResMed, and Star Entertainment shares are sinking today
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cettire. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Legendary investor Peter Lynch wrote in his 1989 book One Up on Wall Street that the price-to-earning (P/E) ratio of any company that’s fairly priced will equal its growth rate.

To calculate the PEG ratio, you divide the P/E ratio by the earnings growth rate. For example, if a company has a P/E ratio of 20 and an expected earnings growth rate of 10% per year, the PEG ratio would be 2.

Peter Lynch’s statement implies that for a growth stock with an expected annual earnings growth of 20%, investors should ideally not pay more than a P/E ratio of 20.

This is a fairly conservative metric to apply. Let’s take some examples of ASX growth shares using FY25 P/E ratios and their earnings-per-share (EPS) estimates for two years from FY24 by S&P Capital IQ:

• Pro Medicus Limited (ASX: PME) shares are trading at a P/E of 140x for a two-year EPS compound annual growth rate (CAGR) of 30%
• Lovisa Holdings Ltd (ASX: LOV) shares are trading at a P/E of 32x for a two-year EPS CAGR of 26%
• Netwealth Group Ltd (ASX: NWL) shares are trading at a P/E of 50x for a two-year EPS CAGR of 22%.

Using these numbers, the PEG ratios for Pro Medicus, Lovisa, and Netwealth would be 4.7x, 1.2x, and 2.3x, respectively.

Of course, this is not to say the above ASX growth shares will stop rising. They may continue rising, especially if they exceed market expectations through faster market penetration or cost savings. Some investors might prefer high-growth companies over cheap multiples.

With that said, the PEG ratio is a useful tool for finding undervalued stocks relative to their expected growth.

So, let’s explore two ASX shares trading at below 1x PEG ratio today.

Collins Foods Ltd (ASX: CKF)

Down 18% from the beginning of 2024, KFC operator Collins Foods appears to be in the value zone.

The consensus earnings estimates by S&P Capital IQ imply the company’s EPS will increase from 51 cents in FY24 to 74 cents in FY26 at a two-year CAGR of 20%.

Collins Foods shares are currently trading at an FY25 PE of 15x, giving us a PEG ratio of 0.7x.

Yesterday, the company reported strong results for FY24, with its revenue rising 10.4% to $1,489 million, excluding divested Sizzler Asia, and underlying earnings before interest and tax (EBIT) up 15% to $124.1 million. The robust results were driven by continued strength in the KFC Europe business.

The Collins Foods share price closed on Tuesday at $10.00.

Corporate Travel Management Ltd (ASX: CTD)

As its name suggests, Corporate Travel Management is a global provider of innovative and cost-effective travel solutions for corporate clients.

Corporate Travel Management shares have dropped 23% over the past year, putting its forward P/E ratio at just 14x. This is fairly low, considering its P/E ratio was 11.5x in March 2020 at the height of the COVID-19 pandemic.

Based on estimates by S&P Capital IQ, the market predicts its EPS will grow from 86 cents in FY24 to $1.13 in FY26. This implies a two-year CAGR of 15% and a PEG ratio of 0.9x.

Now, as my colleague Bernd highlighted, ASX 200 travel shares are experiencing some headwinds from fuel costs. While airlines would take a direct hit from the fuel charges, higher ticket prices can impact travel demand.

On the flip side, these ASX travel shares, including Corporate Travel Management, can benefit from the government’s cost-of-living relief measures, as Bernd added.

If analysts’ current EPS estimates are accurate, Corporate Travel Management shares appear cheap based on the PEG ratio.

Corporate Travel Management shares closed on Tuesday trading at $13.72.

The post 2 ASX shares that would pass Peter Lynch’s favourite valuation metric appeared first on The Motley Fool Australia.

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• What’s ahead for ASX 200 travel shares in FY 2025?

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Corporate Travel Management, Lovisa, Netwealth Group, and Pro Medicus. The Motley Fool Australia has positions in and has recommended Corporate Travel Management and Netwealth Group. The Motley Fool Australia has recommended Collins Foods, Lovisa, and Pro Medicus. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Looking for some high-quality real estate investment trusts (REITs) to consider that may be too cheap to ignore right now?

Why? Every six months, an ASX REIT informs the market of its portfolio’s underlying value. This value may not be exactly what the business would get if all the properties were sold. But it’s an indication.

Imminent interest rate cuts (hopefully) could encourage the market to buy at a share price closer to the underlying net asset value (NAV). And higher share prices would push down potential distribution yields.

Having said all that, the two below are my favourite REITs right now:

Rural Funds Group (ASX: RFF)

Rural Funds owns a portfolio of farmland in different Australian states and climactic conditions. It invests in various sectors, including cattle, vineyards, almonds, macadamias, and cropping.

In December 2023, the business reported an adjusted NAV of $3.07 per unit, as it benefited from independently revalued assets. At the current Rural Funds share price, it’s valued at a 31% discount to the December NAV. That is a significant discount.

The ASX REIT is benefiting from revenue growth with steady rental growth at its farms. Some farms have a fixed annual rental increase, typically 2.5%, while other farms’ rental income growth is linked to inflation.

At the current Rural Funds share price of $2.11, it has an FY24 distribution yield of 5.5%. I think that is a good starting point.

Centuria Industrial REIT (ASX: CIP)

This ASX REIT owns a portfolio of industrial properties spread across various metropolitan markets.

Industrial property is in high demand as companies look to meet growing online shopping volume and onshore more of the supply chain. Land to build new distribution centres in our major cities is limited.  

In the FY24 third quarter update, Centuria Industrial REIT advised it had seen releasing spreads of 50% in FY24 to date. That means it’s achieving 50% higher rents on new leases compared to the old lease for the same property. It’s a huge increase, and this can drive rental profits and distributions higher in the foreseeable future.

At 31 December 2023, the business had $3.89 of net tangible assets (NTA) per unit. The current Centuria Industrial REIT share price of $3.17 is at a discount of 18% to this, which looks very appealing to me.

According to the ASX REIT’s fund manager Grant Nichols, the expected population expansion to 2025 is predicted to lead to an increase of Australian industrial demand by around 4.5 million square metres.

At the current share price, Centuria Industrial REIT has an FY24 distribution yield of 5%.

The post 2 top ASX REITs to buy before yields fall alongside interest rates appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Rural Funds Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Investing in ASX shares can be a truly rewarding experience in every sense of the word. But many investors avoid the stock market due to the perception of it being a risky place to keep their money.

While this is true to a certain extent, the reality is that if you invest prudently, the chances of obtaining a compelling rate of return on your money are a lot higher than you losing your hard-earned dollars.

Today, we’re going to prove this concept out by looking at what kind of return an investor can expect by ploughing $200 a month into ASX shares.

Assigning an absolute rate of return from the share market is a tricky task. Obviously, each stock portfolio is different. If an investor owns Commonwealth Bank of Australia (ASX: CBA), BHP Ltd (ASX: BHP) and CSL Ltd (ASX: CSL) shares, they are going to have a completely different experience than someone who buys Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Xero Ltd (ASX: XRO) shares.

To get around this problem, let’s look at the returns one can expect from an ASX index fund. Index funds are popular investments on the Australian stock market. They allow investors to own a vast swathe of ASX shares in one single investment.

Your typical ASX index fund will hold either the largest 200 or 300 shares on the Australian markets, weighted towards market capitalisation (company size).

In this way, an ASX index fund will give you something akin to an average return of the entire ASX. As such, it’s a great investment to analyse if you’re wondering what the average return from the Australian stock market might be.

What kind of returns can one expect from ASX shares?

The Vanguard Australian Shares Index ETF (ASX: VAS) is an exchange-traded fund (ETF) that also happens to be the most popular index fund on the ASX. It tracks the S&P/ASX 300 Index (ASX: XKO), which means it gives its investors diversified exposure to the largest 300 individual stocks on our share market, including the six named above.

So what kind of returns can we expect from this ETF? Well, We should never use past performances as an oracle of future returns. However, this index fund has returned an average of 8.98% per annum (as of 31 May) since its ASX inception in May 2009. That 8.98% consists of both capital gains and dividend returns.

Let’s assume VAS continues to appreciate at this rate for argument’s sake. If one invests $200 every month into this index fund, it will build up to a portfolio worth $15,390 after five years of investing. That would grow to $39.148 after ten years and to $134,486 after 20 years.

If someone kept up this simple habit over a 40-year working lifetime, they would be left with a nest egg of $937,881.

If that investor managed to increase their monthly contribution to $300, they would be looking at a 40-year balance of roughly $1.41 million. That’s more than enough for a comfortable retirement, even if we don’t account for superannuation.

This exercise just goes to show the power of investing consistently in compounding assets.

The post What kind of return could I expect by investing $200 monthly into ASX shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in CSL, Telstra Group, and Vanguard Australian Shares Index ETF. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Xero. The Motley Fool Australia has positions in and has recommended Telstra Group and Xero. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

AMP Ltd (ASX: AMP) shares are one of the most interesting investments on the ASX. This storied Australian company has a long and controversial history, making the journey from respected blue chip stock to penny stock (and arguably laughing stock), to middling ASX share.

When it first joined the ASX boards in 1997, AMP quickly established itself as a robust dividend payer. But years of scandals and mismanagement in the 2010s saw AMP shares reduced to a rump of what they once were.

To give you an idea of how much this company fell to earth, consider this. In June 2001, AMP was trading at more than $14.50 a share. But late last year, those same shares hit an all-time low of just 86 cents.

Since that low, AMP shares have recovered a little. At the time of writing, they are going for $1.11 each, up almost 30% from that record low.

At the current share price, AMP is trading on a seemingly solid dividend yield of 4.05%. That yield comes from the company’s last two dividend payments: the interim dividend of 2.5 cents per share, paid out last September, and the final dividend of 2 cents per share, which we saw in April.

That final dividend might have come as something of a disappointment, seeing as 2023’s final dividend was worth 2.5 cents per share. But investors have arguably been lucky to get any income at all, considering AMP shares paid out no dividends whatsoever between March 2019 and April 2023.

Even so, longer-term investors might be thinking wistfully of the past. To illustrate why, remember that in 2018, AMP shares forked out a total of 24.5 cents per share in dividend income.

Do the dividends from AMP shares come with full franking credits?

But let’s get down to the crux of today’s article: do AMP shares come fully franked?

Well, in a word, no. AMP has never consistently paid out fully franked dividends, even back in the its heyday.

Some of its past dividends have been partially franked up to 90%, but we haven’t seen a fully franked AMP dividend for at least two decades.

Over the past year, AMP investors haven’t enjoyed much in the way of franking credits from their dividends. Both the September interim dividend and the April final dividend that AMP paid out over the past 12 months came partially franked at 20%.

Given this company’s franking history, I wouldn’t be holding my breath for a franked dividend anytime soon, either. At least AMP investors still have a decent 4.05% yield to enjoy today. Not to mention the company’s significant share buybacks that investors have been benefitting from in recent months.

The post Do the dividends from AMP shares come fully franked? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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 Scott Phillips.

Perpetual Ltd (ASX: PPT) shares could be a bit of a bargain buy right now.

That’s the view of analysts at Bell Potter, which feel that the ASX 200 fund manager stock is being undervalued by the market.

What is the broker saying about this ASX 200 stock?

Bell Potter notes that the company recently announced the sale of its Corporate Trust (CT) and Wealth management (WM) businesses to KKR for $2.175 billion.

It was pleased with the price, highlighting that it was ahead of its expectations of $1.5 billion to $1.9 billion.

The broker assumes a tax liability of $100 million to $400 million and expects the sale to result in a cash payment to shareholders of between $804 million to $1,104 million or $6.95 to $9.55 per share.

Adjusting for the above, the broker believes this leaves the ASX 200 stock trading at a level that makes it undervalued compared to peers. It explains:

Deducting the range of cash payments above, from the current market cap, we estimate the asset management business is being valued at between $1.3-1.6bn including cash and balance sheet assets (seed capital and holdings). Adjusting for these, implies the residual asset management business is being valued at between 3.5x-5.5x EBITDA. We believe this is too low for an international asset manager. Valuing the residual asset management business on 6.3x FY25 would imply a value of $2.1bn or $18.17/per share.

‘Considerable upside’

In light of the above, the broker has reaffirmed its buy rating and $27.60 price target on the ASX 200 stock. Based on its current share price of $21.27, this implies potential upside of 30% for investors over the next 12 months.

In addition, the broker is forecasting dividend yields of 6.4% in FY 2024 and then 7.7% in FY 2025.

Commenting on its valuation, the broker said:

As we draw closer to the demerger, the outcome for shareholders will depend upon the level of tax and deal costs associated with the sale, and current trading. Our unchanged price target of $27.60/sh is at the top of this range of outcomes ($18.17 for AM plus a cash distribution up to $9.55), as we are comfortable with the lower tax estimation, although we have increased our estimate of deal costs (to $200m from $100m). We continue to see considerable upside from the current share price. We have not changed our forecasts in this note, although as the demerger proceeds, we expect to adjust our forecasts for profitability, debt costs and dividends.

The post Guess which ASX 200 stock has ‘considerable upside’ appeared first on The Motley Fool Australia.

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• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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 Scott Phillips.

Innovation is one of the buzzwords of the international business world and stock markets these days.

Low productivity growth is a significant and persistent challenge across many Western nations.

Innovation is seen as essential to turning this around. Technological advancements like artificial intelligence (AI) are among many innovation measures that companies are exploring today.

Innovation means developing new products and services that deliver new revenue. It also means developing new business methods that increase efficiency and thereby raise productivity.

At the recent ASX Investor Day, Betashares investment strategist Tom Wickenden discussed the importance of innovation in powering shareholders’ returns.

He also provided some tips for investors on how to spot an innovation stock in their research.

Which are the best innovation stocks of our era?

Wickenden points out that seven of the nine listed companies that ever reached a trillion-dollar market capitalisation are United States stocks that achieved this feat through major innovation.

Those stocks are known as the Magnificent Seven. They are Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), Meta Platforms Inc (NASDAQ: META), Amazon.com, Inc. (NASDAQ: AMZN), Apple Inc (NASDAQ: AAPL), Nvidia Corp (NASDAQ: NVDA), Microsoft Corp (NASDAQ: MSFT), and Tesla Inc (NASDAQ: TSLA).

What makes them so magnificent?

The short answer is incredible revenue growth and, hence, share price growth over the past 10 years.

All seven stocks are listed on the NASDAQ-100 Index (NASDAQ: NDX), which Wickenden describes as “the home of innovation globally”.

The NASDAQ 100 has many technology stocks, but that’s not the only sector represented.

For example, six of the Mag Seven are US tech shares. The outlier is Tesla, a consumer cyclical stock.

Tesla is certainly an innovation leader among car manufacturers. It’s now the second-biggest electric vehicle manufacturer in the world.

Other companies in other sectors are also innovation leaders.

In the healthcare sector, consider the companies producing GLP-1 medicines. Their innovation has led to new medicines with incredible efficacy in treating the worldwide epidemic disease of obesity.

Consider the energy companies pioneering renewables in the era of decarbonisation. And so on.

How do you identify an innovation stock?

Wickenden says innovation requires a serious commitment to research and development (R&D).

So, examining a company’s R&D spending is a good place to start in identifying an innovation stock.

Take a look at the amount of money spent on R&D, the percentage of profits reinvested, and whether R&D investment is rising.

He emphasises that a large R&D spend doesn’t guarantee success, so investors need to conduct further research once they’ve identified stocks that are investing in innovation.

Investors need to find out what products, services or business practices have improved due to R&D, and whether this has translated into revenue growth that is likely to be ongoing.

Wickenden said the NASDAQ 100 is “home to some of the most innovative companies in the world and also some of the biggest R&D spenders in the world”.

Wickenden stated:

We can see … over the past 10 years huge growth of research and development spending has coincided with huge growth of revenue and ultimately earnings growth for that index compared to other companies globally and especially compared to the Australian market.

Innovation often requires companies to “cannibalise” their own market share, Wickenden explains. This means developing products and services that make a company’s existing ones irrelevant.

If they fail to do so, they are likely to “succumb to new players in the market” as technology advances.

Case study: Microsoft

Ten years ago, Microsoft was a leader in locally stored enterprise software.

However, it chose to invest tens of billions in cloud computing — which would eventually make locally stored software redundant — and this has delivered exceptional revenue growth.

Between 2011 and 2014, Microsoft was the second-biggest R&D spender in the world behind Samsung Electronics Co Ltd (LSE: BC94).

Wickenden said:

Interestingly, in 2011 … they spent 90% of their research and development expenses on a cloud computing division. And … that cloud computing division is driving their growth in terms of revenue and earnings and, ultimately, their share price growth.

Today, Microsoft’s cloud computing division alone delivers more revenue than Australia’s Big Four ASX 200 bank shares combined.

The banks’ combined revenue has been nearly stagnant at about $80 billion over many years.

This is partly because the scope for innovation in a mature sector like banking is far lower than in the information technology sector.

Meantime, revenue from Microsoft’s cloud computing division has skyrocketed. Its leapt from nearly AU$30 billion in 2015 to more than AU$120 billion in 2023, Wickenden said.

Since January 2015, the Microsoft share price has risen by about 850% to US$$447.67 today.

But if doing all this research is too much trouble, Wickenden says the exchange-traded fund (ETF) Betashares Nasdaq 100 ETF (ASX: NDQ) provides a simple way to invest in many innovation stocks.

Over the past five years, the NDQ ETF share price has risen 135%, while the ASX 200 has risen 18.5%.

The post How do you spot an innovation stock? appeared first on The Motley Fool Australia.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet, Amazon, Apple, BetaShares Nasdaq 100 ETF, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF. The Motley Fool Australia has recommended Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.