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Peter Lynch is renowned for his success as a mutual fund manager at Fidelity Investments and for his straightforward and practical investment philosophy.

Lynch’s approach emphasises thorough research, a long-term perspective, and an understanding of the businesses behind the stocks.

Here are three critical pieces of investment advice from the investing legend that can help investors navigate the complexities of the stock market.

If you like these Peter Lynch principles, don’t forget to check out my recent article about 3 investing mistakes as well.

Water the flowers, cut the weeds

Imagine reviewing your stock portfolio. Undoubtedly, there are stocks that haven’t performed as well as expected when you initially invested in them.

It’s intriguing how human psychology works. We often hold onto our losses more tightly than we celebrate gains elsewhere. This is known as ‘loss aversion’. Sometimes, we add to the losers, hoping that will lower the poor-performing stock’s average purchasing price.

In the contract, Lynch advises you to focus on the winners in your portfolio. In Lynch’s metaphor, flowers represent high-quality companies with solid fundamentals, growth potential, and a competitive edge in their industry. These companies are likely to thrive over the long term and generate significant returns for investors.

After all, it is those handful of stocks with oversized gains that will lift your portfolio’s overall performance, offsetting losses from some underperforming stocks.

Your portfolio could include Pro Medicus Limited (ASX: PME) or Washington H Soul Pattinson & Company Ltd (ASX: SOL). Make sure the winners keep on winning by adding them whenever appropriate share prices become available.

Invest in what you know

I think this must be one of Peter Lynch’s most famous pieces of advice. Lynch recommended investing in companies and industries that you understand. Lynch believes investors can have a significant advantage when investing in familiar industries. By doing this, they can make the most out of their knowledge and expertise gained from day-to-day jobs.

Let’s say you work in the medical imaging industry and notice your company is upgrading its systems to improve operational efficiency. If it happens to be products offered by Pro Medicus, you might be lucky enough to be one of the early investors of this fantastic growth stock.

As an insider of the industry, you would be able to understand the company’s products, market position, and competitive advantages over its competitors. And all of these can be valuable information when assessing your next investment ideas.

Do your homework

Once you find a candidate for your next investment, it is crucial to continue studying this company in depth. Just having an idea is insufficient. Lynch’s investment strategy centres around thorough research.

Lynch believed in digging deep into a company’s financial statements, understanding how it makes money and the quality of management. Another famous investor, Warren Buffett, likes to read everything available about a potential candidate company before making an investment decision.

For example, before investing in a company, Lynch recommended studying its annual reports, quarterly earnings releases, and industry publications. By understanding the company’s financial health, growth prospects, and potential risks, investors can better evaluate whether it aligns with their investment goals and risk tolerance.

Foolish takeaway

Peter Lynch’s timeless advice resonates with both novice and seasoned investors alike.

Investors can build a robust portfolio that stands the test of time by focusing on quality, leveraging their own expertise, and conducting thorough research.

The post 3 pieces of investment advice from Peter Lynch appeared first on The Motley Fool Australia.

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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 Pro Medicus and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Pro Medicus. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

In the competitive world of retail, strategic financial management is key to maintaining a strong market position.

Coles Group Ltd (ASX: COL), one of Australia’s leading supermarket chains, has navigated this landscape with operational strategies and financial manoeuvres.

However, in today’s financial landscape, characterised by rising interest rates, the importance of thorough balance sheet analysis has never been greater. Investors are increasingly focusing on the debt levels of companies to assess their financial health and long-term viability. This is because high interest rates can significantly impact a company’s cost of borrowing, cash flow, and overall financial stability.

With this background, I delve into Coles’ financial health, examine its debt profile, and explore the potential implications in this article.

Debt-to-equity ratio

The debt-to-equity ratio is a way to see how much a company is borrowing compared to how much it owns. Think of it like this:

• Debt is money the company has borrowed and needs to pay back.
• Equity is money that the company’s owners have put into the business.

The debt-to-equity ratio compares these two amounts. It shows how much debt the company has for every dollar of equity.

As at 31 December 2023, Coles has a total debt of $9.4 billion, including lease liabilities of $7.7 billion. Adjusting for its cash and short-term investment balance of $1.1 billion, its net debt reduces to $8.3 billion. The retailer managed to reduce its net debt levels gradually over time, from $9.4 billion in June 2020 to $7.7 billion in December 2023.

Net debt excluding lease liabilities was $1.2 billion, up $133 million from June 2023 due to increased capital expenditures.

During this period, Coles’ equity has risen from $2.6 billion to $3.5 billion, indicating its debt-to-equity ratios have improved from 3.6x to 2.4x. In other words, Coles has $2.4 of debt for every $1 of equity.

This is higher than what I would like to see from a retailer, but it is optimistic that this ratio is improving. This is also slightly better than its rival Woolworths Group Ltd (ASX: WOW) at 2.8x based on its December 2023 financials.

Is Coles making sufficient profits to cover interest payments?

Another important metric to measure a company’s financial health is the interest coverage ratio. It is a measure of how easily a company can pay the interest on its debts using its operating income.

For the last 12 months to December 2023, Coles generated an operating income of $1.7 billion. In fact, its operating profits have stayed consistently between $1.6 billion and $1.8 billion over the last four years.

From the operating profits, Coles spent $397 million on net financing costs during the same period. This expense has reduced from $431 million in FY20 as its improved debt levels offset the impact of interest rate increases.

These two figures give us an interest coverage ratio of 4.4x, indicating its current income is sufficient to cover interest expenses.

On the cash flow side, which can be different from the income statement, Coles makes an operating cash flow of $2.7 billion a year, which has been consistently moving between $2.7 billion and $2.8 billion since FY21. This is sufficient to cover its increased needs for capital expenditure (capex) of $1.7 billion and lease obligations of approximately $900 million a year.

Foolish takeaway

In this article, we reviewed a few important metrics to assess the financial health of Coles’ balance sheet.

While its debt-to-equity ratio appears to be high, the company generates sufficient income to cover debt servicing expenses for now, in my opinion.

The post Buying Coles shares? Here are key metrics you’ll want to know appeared first on The Motley Fool Australia.

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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 no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Commonwealth Bank of Australia (ASX: CBA) shares closed up 1.11% yesterday, trading for $125.48 apiece.

That sees shares in the S&P/ASX 200 Index (ASX: XJO) bank stock up an impressive 30% since this time last year, not including the two fully franked dividends eligible shareholders will have received.

And it sees Australia’s biggest bank commanding a market cap of $210 billion.

Now investors who’ve listened to the chorus of bearish analyst views on the valuation of CBA shares may have been spooked into selling their holdings and missed out on some of those outsized gains.

Investors who’ve kept their long-term goals in mind and held onto shares, on the other hand, should be sitting pretty.

How pretty?

Let’s dig in.

500 CBA shares at 2014 prices please

One year ago, on 13 June 2014, I could have snapped up CBA shares for $81.39 apiece.

Meaning my 500 shares would have set me back an even $40,695.

A tidy sum, to be sure. But an investment that would have paid off in spades.

At yesterday’s closing price of $125.48 a share, my 500 shares would now be worth an even $62,740.

That equates to a 54.17% gain on my initial investment.

Not bad.

But let’s not forget the dividends.

Why passive income investors like CommBank stock

CBA shares have long been a favourite among passive income investors.

That’s because the big four bank has a lengthy track record of paying two annual, fully franked dividends a year. A record that reaches back more than a decade. And one that includes the pandemic addled year of 2020.

If I’d bought CommBank stock on 13 June 2014, I would have been eligible to receive the $2.18 final dividend. That welcome passive income would have hit my bank account on 2 October 2014.

I would then also have received 19 more dividend payouts to date.

Turning to my trusty calculator, that works out to a total 10-year payout of $40.47 per CBA share. With some potential tax benefits from those franking credits.

Now, I’d likely have done better by reinvesting those dividends as they came in.

But we’ll assume I spent that passive income on some extra little luxuries instead.

So, we’ll just add that $40.47 in dividends into yesterday’s closing share price of $125.48, which brings the accumulated value of my CBA shares bought 10 years ago to $165.95.

Meaning my 500 shares, purchased for $40,695, would now be worth an accumulated $82,975.

That represents a gain of 103.90%.

Happy investing!

The post Here’s how much I’d have if I’d bought 500 CBA shares 10 years ago appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben 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.

More than two million Australians are receiving dividend income in retirement, new data suggests.

This dividend income comes from either their superannuation or directly held ASX shares or international equities like US shares.

The Australian Bureau of Statistics (ABS) recently published its Retirement and Retirement Intentions report, which documents all of the income sources for Australia’s 4.2 million retirees in FY23.

Let’s take a look at the numbers.

Dividends a popular source of retirement income

Superannuation is the second biggest source of income for retirees overall, behind the age pension.

The ABS report found that superannuation was a source of income for 1,655,500 retirees or 39.6% of the retired population.

It was the main source of income for a large percentage of this group at 1,119,400 retirees, or 26.8%.

The ABS data does not delineate how many retirees’ superannuation funds are invested in dividend shares. But it’s a fair bet many of those super funds have at least some monies allocated to shares.

Apart from the 100% cash option, the most conservative superannuation strategy offered by most funds still allocates about 30% of monies to shares and property, according to moneysmart.gov.au.

Why are ASX dividend shares popular?

ASX dividend shares, which are typically large, well-established companies like the major banks, are popular investments for retirees not only because they deliver reliable passive income but also because of our unique franking credits regime in Australia.

Franking credits can be used by any investor — retired or not — to offset their tax liabilities. But if the value of your franking credits exceeds your tax liability, you can receive a cash refund.

This is a common scenario for retirees because the taxable component of their incomes is typically low.

This is because income streams from superannuation are usually tax-free, and as the ABS data shows, a large portion of retirees rely on superannuation for at least part of their retirement income.

Thus, the tax retirees have to pay on their other investment income, such as property rent, may be less than the value of their franking credits. So, they get a refund.

The ABS data also showed that many retirees receive dividend income from directly owned shares investments outside superannuation.

The ABS groups this dividend income together with interest from cash savings.

It found that dividends or interest were a source of income for 347,300 people or 8.3% of retirees.

Dividends or interest were the main source of income for 123,500 retirees, or 3% of retirees.

According to Super Guide, the most popular ASX stock held by Australia’s 616,400 self-managed superannuation funds (SMSFs) is BHP Group Ltd (ASX: BHP), which is a renowned dividend payer. Other popular holdings include National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC).

The ABS data also looked at how many retirees receive rental income from an investment property.

Rent was a source of income for 189,900 retirees or 4.4% of the retired community.

It was the main source of income for 100,800 retirees or 2.4%.

The post How many Australians receive dividend income in retirement? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has positions in BHP 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 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.

Sometimes there can be great investment opportunities hidden in plain sight.

Three such examples could be the ASX shares in this article.

They may not get much attention from investors, but they could generate good returns for them according to analysts at Bell Potter.

Here’s what the broker is saying about these under the radar shares:

Australian Foundation Investment Co Ltd (ASX: AFI)

Bell Potter thinks that this investment company could be a great option for investors.

It has recently spoken very highly about the company’s investment strategy and appears to believe it will underpin great returns for investors. It said:

Australian Foundation Investment Co is a closed end fund investing predominantly in Australian and New Zealand equities. The investment philosophy seeks to identify well-priced priced companies by considering: (1) the uniqueness of assets, brands and footprints; (2) long-term sustainability characteristics, return on invested capital and the ability to grow or maintain market share; (3) recurring revenues and the likelihood of consistent earnings for shareholders; (4) confidence in the pedigree of the Board and management team; and (5) lowly geared balance sheets. The long-term buy-and-hold approach results in a low level of capital gains tax payable, and the provision of internal investment resourcing keeps the cost base low with scale (0.14% MER).

Bell Potter has a buy rating and $7.72 price target on its shares. This implies potential upside of 7.2%. A 3.2% dividend yield is also expected by the broker.

IPD Group Ltd (ASX: IPG)

Another under the radar ASX share for investors to look at buying is IPD Group. It is a leading distributor of electrical equipment and industrial digital technologies.

Bell Potter believes that the company is well-placed to benefit from the electrification trend. It explains:

We view IPG as a high-quality play on the electrification growth trend which is emerging as a dominant market narrative. Our favourable investment thesis is based on three key points: (1) product volumes being driven by refurbishment/ upgrade of existing infrastructure and by virtue of relatively low demand risk; (2) IPD’s large turnaround opportunity with a globally leading manufacturer in ABB (market share in Australia of 5-10% compares to Europe of 20-30%); and (3) IPD’s electric vehicle charging opportunity reaching a tipping point in FY24e. Australia is set for a $650m public fast charging investment cycle by 2027 and IPD is engaged with a number of players who we expect to lead this transition (e.g. service station chains and network operators).

Bell Potter has a buy rating and $5.60 price target on its shares. This suggests that upside of 31% is possible over the next 12 months.

Regal Partners Ltd (ASX: RPL)

A third ASX share that could be flying under the radar is Regal Partners. It was formed in 2022 following the merger of Regal Funds Management and VGI Partners.

Regal Partners manages a broad range of investment strategies covering long/short equities, private markets, real and natural assets, and credit and royalties on behalf of institutions, family offices, charitable groups, and private investors.

Bell Potter believes the company’s positive performance and outlook is not reflected in its share price. It said:

In recent years the firm has expanded rapidly through strong investment performance, net flows into its funds, launches of new funds, and the acquisition or merger with VGI Partners, PM Capital and Taurus. We continue to favour RPL, given its strong organic & inorganic growth potential, and entrepreneurial culture. In the last six months, and following the recent acquisition of PM Capital and Taurus (50%), the firm has shown an acceleration of inflows, strong investment performance (which will give rise to performance fees) and success in marketing new funds. We feel this strong performance is not reflected in the share price and see considerable upside.

The broker has a buy rating and $4.02 price target on its shares. This implies potential upside of 11% for investors. It is also forecasting a ~4.7% dividend yield.

The post 3 under the radar ASX shares to buy this month appeared first on The Motley Fool Australia.

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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 positions in and has recommended Ipd Group. The Motley Fool Australia has positions in and has recommended Ipd Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Pilbara Minerals Ltd (ASX: PLS) share price has just endured another red day.

The lithium miner’s shares ended the session 2.5% lower at $3.32.

This latest decline means that that lithium giant’s shares are now down 30% over the last 12 months.

It also leaves them trading within sight of their 52-week low of $3.10 and a long way from their 52-week high of $5.43.

But what about the next 12 months? Could things be better for the Pilbara Minerals’ share price and its shareholders? Let’s find out.

Where could the Pilbara Minerals share price be in 12 months?

Firstly, the main driver of the company’s share price performance from here will be the lithium price.

If the price of the white metal rebounds strongly, then its shares could hurtle higher. However, the general consensus is that lithium will be staying lower for the foreseeable future.

As a result, the broker community is feeling reasonably apathetic about the Pilbara Minerals share price right now.

For example, in the bear corner, Goldman Sachs is currently tipping its shares as a sell with a $2.80 price target. This implies potential downside of almost 16% for investors from current levels.

UBS is feeling a touch more bearish and has a sell rating and $2.70 price target on its shares, which suggests that they could fall almost 19%.

But there’s reason for optimism.

Value could be emerging

The Pilbara Minerals share price has fallen so much recently that some neutral brokers are now seeing a lot of value emerging. This could be good news for its shares over the next 12 months.

One of those brokers is Macquarie. Last month, its analysts reaffirmed their neutral rating and $4.20 price target on the company’s shares.

This price target implies potential upside of almost 27% for investors from current levels. That’s better than the potential returns on offer with some buy-rated shares!

It is a similar story at Morgans. Although the broker downgraded the Pilbara Minerals share price to a hold rating in April, its price target of $4.10 is now materially higher than where its shares trade. So much so, investors would generate a 23% return if its shares were to rise to that level.

Unfortunately, it is impossible to say with certainty where the lithium giant’s share price will be in 12 months. But there’s certainly potential for it to be meaningfully higher than where it trades today. But conversely, as you can see above, it could also be materially lower. Time will ultimately tell which brokers have made the right call.

The post Where could the Pilbara Minerals share price be in 12 months? appeared first on The Motley Fool Australia.

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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 positions in and has recommended Goldman Sachs Group and Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Here are the top 10 ASX 200 shares today appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in A2 Milk. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Life360, Nanosonics, PolyNovo, and REA Group. The Motley Fool Australia has positions in and has recommended Nanosonics. The Motley Fool Australia has recommended A2 Milk, Jb Hi-Fi, Nine Entertainment, PolyNovo, and REA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Whilst the S&P/ASX 200 Index (ASX: XJO) spent all day in the green today before closing 4.4% higher, one ASX 200 stock has been sold off sharply.

ASX Ltd (ASX: ASX) shares took a significant hit, plummeting 8% to $58.14 at the close of trading.

This sharp decline follows the company’s investor forum held on Thursday, where it outlined its financial guidance for FY 2025. Investors appeared less than impressed with some of the projections. Here’s a look.

Why did this ASX 200 stock drop 8%?

At its investor forum, the company revealed that it expected its total expense growth rate to be between 6% and 9% for FY 2025. This comes on top of an anticipated 15% increase in FY 2024.

The primary driver for this cost escalation is ongoing investment in technology, including software licensing, equipment costs, and depreciation and amortisation.

Depreciation and amortisation are said to be ‘non-cash expenses’ in finance, related to business assets. While this is technically true – we don’t physically pay depreciation, for example – they do represent the implied cost of maintaining these assets. The ‘wear and tear’, so to speak.

ASX managing director and CEO Helen Lofthouse provided an update on the company’s five-year strategy, focusing on technology modernisation and regulatory commitments.

“Our five-year strategy builds on a high-quality portfolio of businesses that deliver resilient revenue performance throughout market cycles,” Lofthouse said.

She added that data demand and Australia’s pension system – the fifth largest in the world – were two structural tailwinds behind the ASX 200 stock.

But Lofthouse was less optimistic about the expenditure side. ASX is projecting an “expense growth rate” of 6–9%, which is not something many were expecting. She had this to say:

This growth is primarily driven by ongoing technology related costs related to Horizon One of our five year strategy including software licencing and equipment costs.

Operating expense growth is partially offset by the annualised saving of $11m as a result of the targeted restructure announced at our interim results in February, and the expected further reduction in one-off regulatory costs following the completion of special reports and other activities last year.

It’s also worth noting the ASX 200 stock is making strides with its CHESS replacement project, partnering with Tata Consultancy Services for a product-based solution.

What else did ASX mention?

Other highlights from the investor day include the launch of the first ASX corporate bond, raising $275 million, and exploratory work with the Clean Energy Regulator to develop an Australian Carbon Exchange.

However, these ambitious projects have come at a cost. The company forecasts capital expenditure for FY 2024 to be around $135 million, with FY 2025 technology capital expenditure expected to be between $160 million and $180 million.

These are up from $50 million in the second half of FY 2024. Lofthouse added:

[W]e expect our capex spend to remain elevated through to FY27 to support our technology roadmap, before starting to reduce beyond this period.

We also expect the average depreciation and amortisation schedule of seven to ten years for these major projects, once they go live.

How will this affect ASX shareholders?

The projected expense growth and capital expenditure might have caused concern among investors of this ASX 200 stock today, leading to today’s 8% drop in the share price. Despite this, the company plans to maintain a dividend payout ratio of 80% to 90% of underlying net profit after tax (NPAT).

ASX’s significant investment in technology and regulatory commitments are also crucial for its long-term strategy. Investors would be wise to keep a close eye on how these investments play out over the coming years.

The post Guess which ASX 200 stock crashed 8% on Thursday appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow 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.

Two well-known S&P/ASX 200 Index (ASX: XJO) shares were just upgraded by leading brokers.

Both stand to potentially benefit from the rapid advancement of artificial intelligence (AI). And both have already handed their shareholders some sizeable one-year gains.

Which ASX 200 shares are we talking about?

Read on!

(Broker data courtesy of The Australian.)

Two ASX 200 shares earning broker upgrades

The first ASX 200 share earning a broker upgrade is WiseTech Global Ltd (ASX: WTC).

Shares in the logistics software provider are up 2.3% at the time of writing, trading for $99.12 apiece. That sees shares in the tech stock up more than 24% in a year.

WiseTech shares also trade on a slender, fully franked dividend yield of 0.2%.

And Bell Potter foresees some modest further gains ahead.

The broker raised its price target for WiseTech by 8% to $100.00 a share.

WiseTech shares could get a boost during the final week of the month. On 24 June the company joins the acclaimed S&P/ASX 50 Index. That’s part of  the S&P Dow Jones Indices June quarterly rebalance.

Which brings us to the second ASX 200 share getting a broker upgrade today, Seek Ltd (ASX: SEK), which owns and operates Australia’s biggest online jobs classified website.

The Seek share price is up 3.0% at the time of writing, with shares trading for $23.51 apiece. That puts the Seek share price up 8% in a year.

Seek shares also trade on a fully franked trailing dividend yield of 1.8%.

And JP Morgan expects some sizeable potential gains over the year ahead.

The broker raised Seek to an overweight rating with a $26.50 share price target. That’s almost 13% above current levels.

Last week, 5 June, the ASX 200 share grabbed investors’ attention when management announced the company had entered into a binding agreement to sell 98.2% of its stake in OCC Mexico and all of its stake in Catho Online to Red Arbor Holding.

Seek will receive US$85 million (AU$128 million) for these assets. The company expects the transaction to be complete by the end of the month and intends to use the funds to pay down some debt.

The Seek share price closed up 4.9% on the day, despite the company forecasting a $15 million to $35 million net loss on sale after tax from the divestment.

That’s likely because the ASX 200 share reported it does not expect the sale of OCC Mexico and Catho Online will result in any material changes to its FY 2024 earnings guidance.

The post Why these 2 ASX 200 shares just scored broker upgrades appeared first on The Motley Fool Australia.

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben 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 JPMorgan Chase and WiseTech Global. The Motley Fool Australia has positions in and has recommended WiseTech Global. The Motley Fool Australia has recommended Seek. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Artificial intelligence (AI) is no longer just for tech behemoths — it’s sprinkling its magic dust across a myriad of industries, creating unexpected winners in the stock market.

Just as we need to eat to survive and function, advanced AI systems require substantial electricity to operate. From this background, the reliability of the electricity supply is increasingly highlighted as a critical vulnerability within the AI ecosystem.

One ASX-listed company that could benefit from this trend is IPD Group Ltd (ASX: IPG), a distributor of electronic and automation systems and solutions across Australia.

Could this under-the-radar ASX small-cap stock be the surprise superstar of the AI revolution? Let’s dive into the potential of IPD Group.

Power shortages

We often hear about semiconductor chip shortages driven by the AI boom and how it is benefitting the likes of Nvidia Corp, Taiwan Semiconductor Manufacturing Co Ltd, and equipment maker ASML Holding NV.

However, Tesla Inc (NASDAQ: TSLA) boss Elon Musk believes power shortages are likely to be the next wave ahead of us. In an interview in March 2024, as part of the Bosch Connected World conference, he said:

The constraints on AI compute are very predictable… A year ago, the shortage was chips, neural net chips. Then, it was very easy to predict that the next shortage will be voltage step-down transformers.

Then, the next shortage will be electricity. They won’t be able to find enough electricity to run all the chips. I think next year, you’ll see they just can’t find enough electricity to run all the chips.

To make things worse, the developed world is already suffering from an inadequate supply of electricity due to ever-increasing energy demand and a slow transition to environmentally friendly energy sources.

The Australian Energy Market Operator (AEMO) warned of the potential risk of blackouts in NSW and Victoria in its May 2024 report, as highlighted by The Australian.

How is IPD Group’s business going?

IPD Group — founded more than 70 years ago — specialises in distributing electrical and automation solutions in Australia. It leverages renowned global brands like ABB Ltd and General Electric Co.

Its services encompass power distribution, industrial control, renewable energy solutions, and testing. More recently, the company expanded into solar energy, aiming to become a one-stop shop for all photovoltaic (PV) system needs ranging from PV equipment and services through the acquisition of Addelec.

In May, IPD Group provided a bright outlook for FY24, as summarised by my colleague James.

The company expects to report earnings before interest, tax, depreciation, and amortisation (EBITDA) between $39 million and $39.5 million, implying a 42% growth from a year ago at the midpoint. These projections exclude costs from the acquisitions of EX engineering and CMI Operations.

IPD Group CEO Michael Sainsbury believes FY24 has been a transformative year for the company, including major acquisitions. He said:

It has been a transformative year for IPD with the completion of two strategic acquisitions, EX Engineering and CMI Operations.

Merging our Addelec and Gemtek businesses has significantly enhanced our EV infrastructure team and we are capitalising on the growth in the market by securing a number of major projects during the year, including the electrification of Australia’s largest bus depot.

How cheap is this ASX small-cap stock today?

The IPD Group share price dropped by approximately 20% from the 52-week high of $5.42 in February this year. As the chart below shows, the IPG Group share price has been hovering between $4 and $5 for the last 12 months after more than quadrupling since its initial public offering in December 2021.

IPD Group shares are trading at a price-to-earnings ratio of 21x based on its reported earnings for the last 12 months to December 2023.

I think IPD Group has the potential to benefit from anticipated power shortages caused by the ongoing AI revolution, as well as electric vehicles and green energy initiatives.

The post Is this ASX small-cap stock an overlooked beneficiary of the AI boom? appeared first on The Motley Fool Australia.

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Motley Fool contributor Kate Lee has positions in ASML and Nvidia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ASML, Ipd Group, Nvidia, and Tesla. The Motley Fool Australia has positions in and has recommended Ipd Group. The Motley Fool Australia has recommended ASML and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.