Tag: Motley Fool Australia

The S&P/ASX 200 Index (ASX: XJO) is rallying hard today. At the time of writing, the ASX 200 is up a hefty 4.10% and back over 5,954 points.

As of yesterday, ASX 200 shares were down more than 7% since last Wednesday. But now it seems whatever brought this panic about has suddenly abated. Hallelujah… right?

Don’t get me wrong, I’m an investor who enjoys seeing ASX shares rise. Rising shares normally translates into rising wealth for me and anyone else who is invested in the ASX share market.

But this ASX market rally today has got me worried.

To understand what’s occurring, let’s look at the could-be reasons for the market’s rally. We can never be absolutely certain with these things, but signs point to the announcement by the US Federal Reserve overnight as the primary catalyst for today’s market moves.

Risk-on, risk-off for ASX market rally

According to reporting in the Australian Financial Review (AFR), last night (our time), the US Fed announced that it will be buying corporate bonds on the secondary bond market. In English, this means that the US central bank is now purchasing the debt of individual companies on the bond markets.

Now, this state of play is highly unusual, if not unprecedented. Normally, central banks like the Fed have stuck with tinkering in the government bond markets. This does have an impact on financial markets, albeit not directly. But buying bonds of individual companies do. Normally, a company’s debt is priced using a classic risk and reward market mechanism. ‘Safer’ companies offer less interest on their debt, and ‘risky’ companies more. If no one wants to pay for a company’s debt, it could be the start of bankruptcy.

But the Fed stepping in and buying up corporate bonds immediately distorts the normal market operation. In my opinion, it signals to companies that they don’t have to worry about being prudent with their capital. It gives hope that the government will always be there to lend them money. Of course, investors (both in the USA and Australia) are cheering this on and sending ASX shares up today.

But I don’t think it’s a cause for celebration. Historically, government intervention in financial markets doesn’t end well. We have a market for a reason – it’s the most efficient (although not completely) mechanism to regulate risk and reward on the bond markets and price and value on the share markets. Messing around with these mechanisms may bring a short-term sugar hit for asset prices, but I see it as a long-term problem.

I’m still investing in ASX shares, of course. History has also taught us that trying to move your money around based on what you think might happen is fraught with danger. But I’m not excited about the Fed buying corporate debt. And I’m certainly not cheering today’s ASX market rally as a result.

More reading

• 3 ASX 200 shares to buy for income and growth
• UBS picks the best ASX retail stocks for the post COVID-19 world
• 3 fantastic ASX 200 shares to buy right now
• Leading brokers name 3 ASX 200 shares to sell today
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high

Motley Fool contributor Sebastian Bowen 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 Why I think this ASX 200 rally is fake appeared first on Motley Fool Australia.

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The Wisr Ltd (ASX: WZR) share price is is flying higher today after the small-cap ASX fintech released a promising trading update.

At the time of writing, Wisr shares have rocketed 32.26% to 20.5 cents. This takes the company’s year-to-date share price gain to just over 30%.

Wisr is an online lender that originates personal loans between $5,000 and $50,000 with 3, 5 and 7 year maturities to Australian consumers. These loans are either retained to maturity or on-sold to retail, wholesale and institutional investors.

What did Wisr announce?

This morning, Wisr revealed that the company has returned to pre-COVID-19 loan origination levels. Wisr attributed this to its rapid response to COVID-19 trading conditions and its low exposure to high-risk COVID-19 sectors.

Despite the company’s tight credit policy, Wisr reported $23.1 million in new loans originated in the first two months of Q4FY20. This comprises $9.3 million in April and $13.8 million in May, which represents 48% month over month growth.

Along with May marking a return to pre-COVID-19 loan origination levels, May also saw new records in total weekly settled loan volume.

Wisr noted that it retains support from all of its funders, with the majority of loan originations in April and May settled into the new Wisr Warehouse. This loan facility is backed by National Australia Bank Ltd (ASX: NAB) and went live at the end of November 2019.

As at 31 May, $10.3 million or 6.7% of total portfolio loan balances are on a COVID-19 related payment referral. This comes as the company provided 395 customers (5.8%) with COVID-19 relief packages during the period 1 March to 31 May 2020. Wisr highlighted these loan deferral rates compare favourably to industry-wide deferral rates for residential mortgages and business loans.

Hiccup in new product launch

Additionally, Wisr reported a slight delay to the launch of its secured vehicle product. The company was poised to launch this product to market in Q4FY20, however, plans have changed in the wake of COVID-19.

“As widely reported, the entire auto sector experienced significant disruption in April and May due to COVID-19 social distancing measures, including inability of buyers to inspect vehicles,” Wisr stated.

As a result, Wisr will roll-out the secured vehicle product across all channels in Q1FY21 in order to maximise the impact of the launch.

Management commentary

Commenting on recent trading conditions, chief executive Anthony Nantes said:

“Our key origination and risk metrics are showing that Wisr’s purpose-led model is driving growth and revenue in line with risk appetite and above management expectations.”

“We expected a period of heightened customer hardship stemming from COVID-19. However, this impact has been very manageable in light of the Company’s very small balance sheet loan exposure, prime customer base and exceptionally low exposure to high risk sectors. We are now back to pre-COVID-19 levels for customer support requests.”

More reading

• Got $3,000? These 5 beaten-down ASX shares are begging to be bought
• Can ASX big banks generate an attractive sustainable dividend yield from FY21?
• ASX 200 down 0.3%: Big four banks mixed & Healius rockets on medical centre sale
• ASX 200 Weekly Wrap: ASX bears take control as market volatility returns
• ASX 200 falls 1.9%, big 4 ASX banks retreat

The post Why the Wisr share price is surging 32% higher today appeared first on Motley Fool Australia.

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Looking to top up your share portfolio? I think ASX tech shares provide plenty of choices.

Australia’s tech sector is growing rapidly, despite being quite small compared to the US market.

Here are two of my top picks right now: Carsales.com Ltd (ASX: CAR) and Bravura Solutions Ltd (ASX: BVS).

Carsales

Carsales has grown strongly over the past few years. In Carsales FY20 half-year report, it showed that between H1 FY16 and H1 FY20, the company managed to grow revenues at an impressive compound annual growth rate (CAGR) of 12%. Earnings before interest, tax, depreciation and amortisation (EBITDA) also grew strongly. EBITDA increased at a CAGR of 9% over the same period.

In its most recent trading update, it revealed that during mid-March to mid-April, car lead volumes were down 25% on normal levels. However, with lockdown restrictions easing, it is more than likely that lead volumes are now picking up.

This tech share has successfully built on its entrenched and dominant position in Australia over the past decade. This has helped to create a protective moat against market competition. This is despite slowing growth in the maturing online auto classifieds market locally.

Most of Carsales’ new growth is now coming from its overseas operations. These divisions now represent 23% of look-through revenue and 18% of look-through EBITDA. I believe that its overseas operations will fuel further strong growth over the next 5–10years. This positions the ASX tech share well for above-average share price growth during that time.

Another ASX tech share to consider: Bravura

Another ASX tech share worth considering is fintech operator, Bravura. It provides mission-critical enterprise software solutions. It services both the wealth management and funds administration industries.

The company provides software solutions for a range of financial products. These span from wrap platforms, superannuation and pension products to life insurance and portfolio administration offerings.

The company’s main operating markets are Australia, New Zealand, the United Kingdom, and South Africa. An impressive blue-chip client list includes the likes of Mercer, JPMorgan, Prudential, and Citi.

What really attracts me to this tech share is that it is a capital-light business model. It is also underpinned by a strong balance sheet.

The company’s flagship offering in Sonata is a next-generation wealth management administration platform. Its market appeal is that it enables users to interact with their clients through a range of devices. Demand for this flagship product continues to grow strongly.

Bravura has not seen a significant decline in demand during the coronavirus pandemic. In addition, the company recently reaffirmed its earnings guidance for FY 2020.

I believe that Bravura is well positioned for strong growth over the next 5–10 years.

More reading

• The top ASX growth shares I would buy for the 2020s
• Is the SEEK share price a buy right now?
• 2 outstanding ASX shares to buy after the market crash
• 3 ASX 200 shares to protect your portfolio from recession
• Why I’d buy Appen and these ASX growth shares for the 2020s

Phil Harpur owns shares of carsales.com Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Bravura Solutions Ltd. The Motley Fool Australia has recommended Bravura Solutions Ltd and carsales.com 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.

The post Here are 2 top ASX tech shares for your portfolio appeared first on Motley Fool Australia.

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Consumer stocks have fared better during the COVID-19 crisis than many feared. But some ASX retail stocks are better placed in the post-coronavirus world.

The ASX retailers that have performed better than expected are those that have capitalised on changes to consumer behaviour during the shutdown.

These include those that can readily ramp up their online presence and sells products that are in demand from stay-at-home consumers.

ASX retail winners and losers

UBS points to another important trend. The increasing importance of customer data, which the broker believes will become the most important currency.

Mind you, not all retail companies have been able to ride these trends and the gap between the haves and have-nots are only set to widen.

“The gap between winners and losers looks set to expand over the next 3+ years,” said UBS.

“What is less clear is how P&Ls [profit and loss] will change for those that capitalise on accelerated structural change.”

3 things to watch for

The broker identified three potential changes to the P&Ls of retailers going forward. The first is the levers for sales growth, which can come from market share gains, utilising data to get shoppers to buy and expansion into new verticals.

The second is margin. There is an opportunity for the better retailers to increase profitability through more targeted promotions, cost-fractionization and more profitable verticals.

Finally, is the ability to lift return on invested capital (ROIC). This is related to expanding profit margins, but also reflects a lower capex in the longer run with the increased move to online and a lower rental bill.

Retailers are actively renegotiating with shopping centre landlords to cut rents and/or reduce the number of shops.

As I wrote last month, mega malls are losing their strategic advantage as the growth of online sales accelerate.

Best retail stocks to buy now

Perhaps the more important question for ASX investors is which retail stocks are best placed to report improvements across all three areas?

While there are a number on the S&P/ASX 200 Index (Index:^AXJO) that fall into this category, including online retailer Kogan.com Ltd (ASX: KGN) and fast food chain Domino’s Pizza Enterprises Ltd. (ASX: DMP), not all are trading on attractive valuations.

If you added this as an extra filter, three consumer-facing stocks stand out, according to UBS.

These are supermarket giant Woolworths Group Ltd (ASX: WOW), stationery and apparel group Premier Investments Limited (ASX: PMV) and KFC franchisee Collins Foods Ltd (ASX: CKF).

More reading

• 3 fantastic ASX 200 shares to buy right now
• Leading brokers name 3 ASX 200 shares to sell today
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high
• Why AusCann, Phoslock, Kogan, & Village Roadshow are dropping lower
• Investing $1,000 into these ASX 200 shares could be a smart move

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd and Premier Investments Limited. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended Collins Foods Limited and Domino’s Pizza Enterprises 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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Over the last three decades the Australian share market has provided investors with an average return of approximately 9.5% per annum.

This means that if you’re going to beat the market over the next decade, you’ll need to aim high and target returns of at least 10% per annum.

But which shares could be capable of beating the market in the 2020s? I think the two listed below could be market beaters:

a2 Milk Company Ltd (ASX: A2M)

I believe that a2 Milk Company could be a market beater over the next decade. This is due to its expanding fresh milk footprint and the growing demand for its infant formula in the China market. This strong demand was evident in the first half when a2 Milk Company’s China label infant nutrition sales doubled to NZ$146.7 million.

While this is a sizeable figure, the company only has a very modest market share. And due to its strong brand and increasing distribution network in the country, I expect the company to capture a greater slice of the market throughout the 2020s and drive further strong earnings growth.

SEEK Limited (ASX: SEK)

Another ASX share which I think could be a market beater in the 2020s is SEEK. While 2020 has been a difficult year for the job listings giant because of the pandemic, I believe its long term outlook is as positive as ever. This is due to its leadership position in the ANZ market and its rapidly growing China-based Zhaopin business.

It is the latter business which I expect to be the key driver of growth over the next decade. In the first half of FY 2020 it contributed 47.8% of SEEK’s total revenue. This is almost double the revenue contributed by the ANZ business. Given the size of the China market and its opportunities in other key Asian markets, I believe the company is well-placed to hit its revenue target of $5 billion later this decade. This compares to revenue of $1,537.3 million in FY 2019.

More reading

• Is the SEEK share price a buy right now?
• 3 five-star ASX shares I would buy today
• ASX shares I’d buy if this decline is a second COVID-19 crash
• S&P quarterly rebalance: A2 Milk added to ASX 50 & NEXTDC in the ASX 100
• 3 of the best ASX 200 blue chip shares to buy today

Motley Fool contributor James Mickleboro owns shares of SEEK Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended SEEK 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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ASX shares can be a great way to grow your wealth over the long-term.

Investing in quality businesses for the long-term can produce great results if you pick correctly.

No ASX share is guaranteed to generate strong capital growth, but I think these ideas could be some of the ones to potentially beat the market over the next decade:

Share 1: Altium Limited (ASX: ALU)

Altium is a leading electronic PCB software business. It is already one of the biggest players in the market and it’s aiming for clear market dominance by the middle of this decade. Altium’s management are aiming for 100,000 Altium Designer subscribers by 2025, which should help reach the revenue goal of US$500 million.

The ASX share wants to keep growing its earnings before interest, tax, depreciation and amortisation (EBITDA) margin as economies of scale benefit the business. Software businesses have an advantage because their software can be easily replicated and distributed for little cost. In the FY20 half-year result Altium reported an EBTIDA margin of 39.7%, up from 38.8%.

I believe Altium is a great business for a number of reasons. I’ve already mentioned the growing profit margins. It’s debt free with a growing cash balance. Altium has been paying a growing dividend. I also like that Altium is growing revenue in multiple regions.

The world is becoming increasingly technological, so Altium’s service will be even more important to its clients. The ASX share’s current client list includes Tesla, Space X, NASA, Google, Siemens, Microsoft, NEC, Belkin, HP, Amazon, Fitbit, Disney and Qualcomm.

Share 2: Pushpay Holdings Ltd (ASX: PPH)

Pushpay is an ASX share which specialises in facilitating electronic donations to not-for-profits. It’s getting a lot of success from the large and medium US church sectors with their large congregations.

Over the long-term the ASX share is targeting US$1 billion revenue, which represents 50% of the medium and large US church segments. In FY20 the company made US$129.8 million of operating revenue. There is a lot of potential growth left. 

I think the Church Community Builder acquisition was a wise one. The two businesses launched a joint product offering in April 2020. Pushpay wants to be able to offer the best-in-class church management system and the best community app.

In FY20 the company generated US$25.1 million of earnings before interest, tax, depreciation, amortisation and foreign currency (EBITDAF). In FY21 management has guided EBITDAF will be between US$48 million to US$52 million. That would be a strong year of growth!

One of the most attractive things to me about Pushpay is about how scalable it is. In FY20 it increased its gross margin by five percentage points from 60% to 65%. I expect the gross margin can keep going up as the ASX share heads towards US$1 billion of revenue.

Share 3: Xero Limited (ASX: XRO)

Xero is another ASX share with excellent growth potential. It’s a cloud accounting software business which provides its service in several countries including Australia, New Zealand, the UK and the US.

Xero’s gross profit margin is very attractive. It increased from 83.6% in FY19 to 85.2% in FY20. Every new subscriber means a lot of the revenue also turns into more gross profit. 

The tech ASX share is still heavily investing for growth, yet the 30% increase in operating revenue in FY20 resulted in a 52% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$139.2 million.

Xero also finally achieved a profit in FY20. Its net profit was NZ$3.3 million and free cashflow increased by 320% to NZ$27.1 million.

The software business continues to grow its subscriber numbers. I think it can add many more over the next decade. In FY20 alone it added 467,000 net subscribers. Each new subscriber is another business paying attractive monthly revenue to Xero.

I think more business owners will choose Xero’s service this decade for the time-saving tools and automation.

Foolish takeaway

In my opinion, all three of these ASX shares are some of the best on the ASX. At the current prices I’d probably go for Pushpay because it has a longer growth runway and its profit margins are rising the fastest. Altium and Xero are great businesses, but I’d prefer to buy them both for around 10% cheaper than what they’re trading at today.

More reading

• Coles shares and 2 other ASX 200 companies to buy in the current market
• Why Nearmap and this ASX mid cap share could be strong buys
• Is the Altium share price the steal of the century?
• $3,000 invested in these 2 shares could make you a fortune over the next 10 years
• The most explosive ASX tech shares you can buy today

Tristan Harrison owns shares of Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Altium, PUSHPAY FPO NZX, and Xero. The Motley Fool Australia has recommended PUSHPAY FPO NZX. 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 certainly are a lot of quality options for investors on the S&P/ASX 200 Index (ASX: XJO).

While not all shares on the benchmark index are in the buy zone, three which I think are great value are listed below.

Here’s why I would buy them today:

BHP Group Ltd (ASX: BHP)

The first ASX 200 share I would consider buying is BHP. The Big Australian is my favourite option in the resources sector due to its diverse, low cost, and world class operations. Another reason I like the company at the moment is due to favourable commodity prices. This is particularly the case with iron ore, which is trading beyond US$100 a tonne. And with many analysts expecting the steel making ingredient to trade at lofty levels for longer due to supply disruptions and robust demand, BHP looks well-placed to deliver strong results in both FY 2020 and FY 2021. As a result, I think the risk/reward on offer with its shares currently is compelling.

Ramsay Health Care Limited (ASX: RHC)

Ramsay Health Care is another ASX 200 share to look at. While the private hospital operator is facing very tough trading conditions, and this is unexpected to change in the near term, the market already understands this and has priced it into its shares. As a result, I think investors should be focusing on its long term prospects, which look very positive. This is due to ageing populations and increasing chronic disease burden which are expected to drive strong demand for healthcare services over the next decade and beyond.

REA Group Limited (ASX: REA)

Another ASX 200 share I would suggest investors consider buying is REA Group. It is a leading property listings company with real estate websites in Europe, Asia, the United States, and Australia. The pandemic has made trading conditions tough for the housing market, but with restrictions now easing there are signs of life again. In fact, last weekend auction clearance rates were very strong, all things considered. I expect trading conditions to improve over the next 12 months and for REA Group’s earnings growth to accelerate once the headwinds it is facing dissipate.

More reading

• Leading brokers name 3 ASX 200 shares to sell today
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high
• Investing $1,000 into these ASX 200 shares could be a smart move
• Coles shares and 2 other ASX 200 companies to buy in the current market
• The Santos share price is down 36%! This is what I’d do today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited and REA Group 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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On Monday I looked at three ASX shares that brokers have given buy ratings to this week.

Unfortunately, not all shares are in favour with them right now. Three that have just been given sell ratings are listed below.

Here’s why these brokers are bearish on these ASX 200 shares:

G8 Education Ltd (ASX: GEM)

According to a note out of the Macquarie equities desk, its analysts have retained their underperform rating but lifted the price target on this childcare centre operator’s shares to 80 cents. Macquarie believes that demand for childcare will be volatile in the near term and expects this to weigh on its performance. Especially given the oversupply of centres across the country. The G8 Education share price is trading at 94.3 cents on Tuesday afternoon.

South32 Ltd (ASX: S32)

Another note out of the Macquarie equities desk reveals that its analysts have downgraded this mining giant’s shares to an underperform rating with a $1.90 price target. The broker made the move due to concerns over the weak prices of some of the commodities it produces. It feels this could lead to South32 falling short of expectations in the near term. Especially with the Australian dollar strengthening and becoming a headwind. The South32 share price is changing hands for $2.05 today.

Star Entertainment Group Ltd (ASX: SGR)

Analysts at Morgan Stanley have downgraded this casino and resort operator’s shares to an underweight rating with an improved price target of $3.30. According to the note, the broker believes that Star’s Sydney business will be negatively impacted by the opening of the new Crown Resorts Ltd (ASX: CWN) resort in the city at the end of the year. It feels this potential disruption has not been priced into its shares currently. The Star share price is trading just below its price target at $3.24 this afternoon.

More reading

• 3 fantastic ASX 200 shares to buy right now
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high
• Investing $1,000 into these ASX 200 shares could be a smart move
• Coles shares and 2 other ASX 200 companies to buy in the current market
• The Santos share price is down 36%! This is what I’d do today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Crown Resorts 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 Zip Co Ltd (ASX: Z1P) share price is up another 10.75% today (at the time of writing) and is sitting at $6.39 a share. That makes it a 5-bagger ASX share (up ~500%) in just 3 months – and a double-up in just the past month alone. That’s right, Zip shares were trading for $1.05 a share back in mid-March, making this buy now, pay later company one of the best ASX shares to have taken a punt on in the depths of the share market crash.

So what’s going on here? And more importantly, are Zip Co shares still a buy today?

Why the Zip Co share price has hit the roof

Along with its BNPL arch-rival Afterpay Ltd (ASX: APT), Zip has benefited form a massive shift in investor sentiment since the panic that March brought. As the extent of the coronavirus lockdowns became clear, investors hit the panic button on BNPL shares.

It was feared that a lockdown-induced credit crunch and massive job losses would lead to a wave of defaults from BNPL users. Despite what the companies might say, Zip and Afterpay can be considered credit providers (in my view). That’s because they extend lines of credit to their users which can be defaulted on.

During the March sell-off, Zip (along with Afterpay) seemed to be treated like an ultra-risky bank share. That saw Zip shares fall more than 70% from ~$4.48 in February to $1.05 by mid-March. Afterpay shares also cratered, falling nearly 80% from around $40 in February to under $9 in March.

But since then, the sentiment has seismically shifted. After investors realised that (partly thanks to government assistance) Zip’s customers were not all about to default on their debts, the Zip share price rebounded in dramatic fashion. Between 19 March and 26 March, Zip shares were up more than 30%.

And then investors realised that the coronavirus pandemic might actually be helping payments companies like Zip Co. Cash as a payment method was already declining in popularity pre-COVID. But with cash usage presenting some hygiene issues during the lockdowns, customers turned to cashless solutions like Zip more than ever.

In fact, last month Zip reported that its revenue was up an astonishing 81% in April 2020. It also reported customer numbers were up 66%.

Is it too late to buy?

I don’t find a lot to like at the current Zip Co share price. Despite Zip being a great growth story, I think there might be a little bit of euphoria going for this company.

I do think  Zip Co deserves a ‘high growth’ share price. But I don’t consider investing in a company after a 500% gain in 3 months a great idea. BNPL payments shares like Afterpay and Zip are highly volatile, and so I think a better strategy is to wait for a dip to pick some shares up, rather than chasing the gains of the past 2 months at today’s prices.

More reading

• Why Afterpay, Super Retail, Uniti, & Viva Energy are charging higher
• ASX 200 jumps 3%: CBA rebounds, Afterpay hits a new record high
• Afterpay and Zip shares are rocketing higher today: Can they go even higher?
• Is the Altium share price the steal of the century?
• The top ASX growth shares I would buy for the 2020s

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

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It’s all well and good to decide to buy ASX shares. But so often, investors think they know a company and its associated risks well, only to be caught short later on. Of course, we can’t account for all possible outcomes – you can’t blame anyone investing in Qantas Airways Limited (ASX: QAN) in January 2020 for not seeing the full impacts of the coronavirus pandemic, for instance. But we can take steps to mitigate the possible risks of investing in a business by putting the company under the microscope.

So here are 3 ‘checks’ I like to go through in a business before I decide if an investment is worthwhile and risk-averse enough.

1) Debt

One thing you can’t take with a pinch of salt when investing is a company’s debt levels. Debt is a major catalyst for companies going into bankruptcy, so it pays to consider how much debt a company has before buying its ASX share. Now, some businesses need debt in order to function in its chosen market. It would be almost impossible for a mining company or a real estate investment trust (REIT) to operate without debt, for instance.

But if a company has a mountain of debt that it doesn’t really need, it’s a massive red flag in my books. So when you’re assessing your next potential investment, have a look to see how much debt its carrying and think about how it might manage to service this debt if there was a major economic crisis. A good place to start is the debt-to-equity ratio (D/E) where more debt than equity is a bad thing.

2) How does it sit with its competitors

Ideally, I like to buy shares of a business that dominates its field. The market leader will usually have several advantages going for it, such as brand loyalty and pricing power that stems from this loyalty. In contrast, a lesser competitor will often be throwing money at discounting its products to try and compete, which ends up weakening the business’s long-term strength. I usually try and buy the ASX share with the biggest advantage in an industry. There’s nothing wrong with backing a winner in investing.

3) Are its shares cheap?

This one seems obvious, but too often investors will want to own a company so much that they will pay a price that doesn’t make sense from an investing perspective. Warren Buffett’s right-hand man Charlie Munger once said, “no company, no matter how wonderful, is worth an infinite price”. Wise words from a wise man.

Buying ASX shares in a great company doesn’t equate to a good investment on its own. You also have to make sure there’s a reasonable chance your investment will give you a decent return over the long run, and buying something that’s overvalued greatly reduced the chances of this. So always be careful about how much growth you’re paying for in a share price. If you’re paying a price that is assuming 20 years of high-octane growth, the chances of something going wrong are high.

More reading

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• Top brokers name 3 ASX 200 shares to buy next week
• Is the Qantas share price a buy today?
• The smartest ASX shares to invest $10,000 in right now

Motley Fool contributor Sebastian Bowen 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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