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The upcoming profit reporting season will keep investors on the edge of their seats and you shouldn’t forget to scrutinise one often overlooked detail in the results.

This is the cash conversion ratio, which most investors either do not know about or brush aside for earnings multiples and growth figures.

Don’t get me wrong, price-earnings (P/E) ratios and sales and earnings growth are still important details this time round, as they are for every reporting season.

Cash ratio as important as profit ratio

But the cash conversion ratio (CCR) is particularly relevant in this COVID-19-stricken market. You’ll see why after I explain what this ratio is.

The CCR measures the amount of cash a company collects as a percentage of earnings. Just because an ASX stock reports a $100 profit, it doesn’t mean it receives $100 in cash.

Calculating the CCR is easy although few companies will do it for you when highlighting their profit and sales performance for the year.

How to calculate the cash conversion ratio

To get the ratio, you take the net operating cash flow (from the cash flow statement) and divide that by the reported earnings before interest, tax, depreciation and amortisation (EBITDA).

Don’t get confused by the cash flow statement as it is broken into three sections – operations, investing and financing. Cash flow from operations reflects the cash a company gets from its ordinary business and what it pays to provide the service or products, and that’s the net figure you want.

Some calculate the CCR by dividing the cash flow with net profits instead. I prefer to use the EBITDA number as amortisation and depreciation charges do not impact on cash and it produces a “cleaner” ratio.

Why cash doesn’t match profit

In the vast majority of cases, you will find that the net cash from operations falls short of EBITDA. This shortfall can be significant too and will vary from sector to sector.

The general rule of thumb is that a company with a CCR of 80% or better is good. If the ratio falls below this, you should investigate why as it could be an early indication of a problem.

So why does a company’s reported EBITDA not match the cash it receives? There are a few reasons for this. It could be a timing issue where a company recognises the profit from a sale before it gets paid by the customer.

Another common reason is an expansion in the company’s working capital, perhaps to fund a build-up in inventory.

Early warning sign

That could be a bullish sign if management is expecting a big ramp up in near-term sales or is gearing up for the start of a big project.

But in this coronavirus recessionary environment, a material increase in working capital could be a warning sign instead as most businesses will be experiencing declining sales.

Further, many ASX companies are probably feeling a cash crunch from the COVID-19 fallout. Booking decent profits isn’t enough to stave-off a capital raising if the cash isn’t coming in fast enough.

Final thoughts

As I’ve written last week, capital raisings are one of the key features I am expecting during the reporting season. Paying attention to the CCR could provide an early clue of a company in need of fresh capital.

As a final thought, the CCR is more relevant to S&P/ASX 200 Index (Index:^AXJO) companies than small caps.

Market minnows often don’t have earnings and are still making losses. You can’t use the ratio if the EBIDTA number is negative.

More reading

• Should fixed-interest investments be part of your ASX share portfolio?
• These were the worst performing ASX 200 shares last week
• ASX 200 drops more than 1%, IAG falls 7.5%
• Escalating US-China tensions are sending these ASX stocks jumping higher today
• Brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

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

The post You should watch this key metric during the reporting season that others often overlook appeared first on Motley Fool Australia.

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It’s the age-old question: should I be investing in super?

The Aussie superannuation system can be divisive. Many, particularly the younger cohort, are reluctant to invest additional cash into their super funds.

However, I’m a big believer in the power that super funds can have to turbocharge retirement plans.

Here are a few reasons why investing more money in super can be a great idea for investors of all ages.

Concessional contributions are taxed at 15%

This is a really big factor in favour of investing in super. Concessional contributions up to $25,000 per year are taxed at just 15% by super funds.

For reference, every dollar earned between $18,200 and $37,000 is taxed at 19%. Beyond that, Aussies are taxed progressively at 32.5%, 37% and up to 45% per dollar above $180,000 per year.

That means investing in super as concessional contributions can generate a significant tax break. As a long-term investor myself, that seems like a no-brainer.

I plan on using that money at 65+ anyway, so I might as well save some tax along the way.

Investing in super means less tax on capital gains

This is another big consideration but one that is often overlooked.

A capital gains event generally occurs when an asset is sold. If that is outside of super and the asset has been held for over 12 months, the investor would get taxed at their marginal tax rate.

However, capital gains within super get another handy tax break. During the accumulation phase, super funds typically receive a one-third discount on any capital gains made.

Given super funds are taxed at the flat 15% rate, that means the capital gain would be taxed at effectively 10%.

That’s compared to anywhere between 19% to 45% for investing outside of super if you earn upwards of $18,200 per year.

Super funds can invest big and long-term

Super funds have large pools of capital to invest across their various strategies. That means investing in super can get you access to investments that would otherwise not be possible.

This includes allocations to private equity, hedge funds and infrastructure assets. These investments can generate liquidity premiums and boost overall returns.

Investing in super is just one part of your strategy

The good news is, it doesn’t have to be all or nothing when it comes to investing in your superannuation. You can still keep your investments outside of super, but you may need less of them.

For instance, you could build up a sizeable portfolio of ASX shares or hold a broad market ETF like BetaShares Australia 200 ETF (ASX: A200) alongside your growing superannuation fund.

If you retire early, you simply draw down your ETF holdings outside of super down to zero until preservation age.

From there, your super investment kicks in and you can have a happy retirement.

But… there are drawbacks

Of course, if it was all good news, everyone would be investing more in super with no questions asked.

The reality is that there is an opportunity cost of contributing more to your superannuation.

That money is locked away for a long time and could be otherwise deployed elsewhere. For instance, you could buy ASX shares outside of super, pay down debt or save for a home deposit.

The First Home Super Saver (FHSS) scheme does help to alleviate this in some sense, but not completely.

There’s also a significant regulatory risk. Many investors worry that the preservation age will change by the time they retire.

The government could also view super as a convenient way to pay back deficits through higher taxes.

Foolish takeaway

In the end, investing additional money in super is a personal choice. However, I think the benefits outweigh the potential risks for me as it currently stands.

More reading

• Are you ready to invest in ASX shares?
• Is the ANZ, APA or CSL share price a strong buy?

Motley Fool contributor Ken Hall 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 investing in super can turbocharge your returns appeared first on Motley Fool Australia.

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At present the interest rates on offer with term deposits are at ultra low levels and struggling to keep up with inflation.

In light of this, I suspect many income investors will be looking for suitable alternatives.

But where can you turn? I think that ASX dividend shares could be the best way to replace your term deposit if you’re after reliable source of income. Especially given the generous yields on offer with many dividend shares right now.

Three ASX dividend shares that I would buy are listed below. Here’s why I like them:

Aventus Group (ASX: AVN)

The first ASX dividend share I would suggest investors look at is Aventus. Although retail property companies are having a very difficult time during the pandemic, I’m optimistic that Aventus will be less impacted than others. This is because it specialises in large format retail parks and has a total of 20 centres across Australia. Its tenancies have a high weighting towards everyday needs and host high quality retailers such as ALDI, Bunnings, Officeworks, and The Good Guys. I believe this leaves it better positioned than most to ride out the storm. As a result, I estimate that Aventus shares could provide investors with a dividend yield of over 6% for FY 2021.

Dicker Data Ltd (ASX: DDR)

Another dividend share to consider buying is Dicker Data. It is a wholesale distributor of computer hardware and software across the ANZ region. Dicker Data has been a strong performer in FY 2020 and reported stellar growth during its recently completed first half, The company reported half year revenue above $1 billion for the first time and a 30.4% lift in net profit before tax to $42 million. In light of this, the company is on course to increase its dividend by 31% to 35.5 cents per share this year. Based on the current Dicker Data share price, this represents a generous fully franked 4.8% dividend yield.

Telstra Corporation Ltd (ASX: TLS)

A final ASX dividend share to consider buying is this telco giant. I think Telstra is one of the best dividend shares to buy on the ASX right now due to its defensive qualities and positive medium term outlook. Those defensive qualities have been on display for all to see this year. For example, at the height of the pandemic, Telstra was able to reaffirm its guidance for FY 2020. Importantly, this includes its free cash flow guidance for FY 2020. As a result, it appears perfectly positioned to continue paying a 16 cents per share fully franked dividend this year. And looking further ahead, I believe this dividend is sustainable for the foreseeable future thanks to its cost cutting, productivity improvements, and price increases. Based on the current Telstra share price, this dividend equates to an attractive 4.8% yield.

More reading

• Fed up of dividend cancellations? Buy these safe ASX dividend shares
• 3 ASX shares to benefit from huge growth in streaming subscriptions during lockdown
• Buy NAB and this ASX dividend share for income
• How are 2019’s tech IPOs performing?
• ASX 200 rises 0.3%, investors bet on Tabcorp

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and Telstra Limited. The Motley Fool Australia has recommended AVENTUS RE UNIT. 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 Replace your term deposit with these ASX dividend shares appeared first on Motley Fool Australia.

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Last week saw a large number of broker notes hitting the wires once again. Three buy ratings that caught my eye are summarised below.

Here’s why brokers think investors ought to buy them next week:

Australia and New Zealand Banking GrpLtd (ASX: ANZ)

According to a note out of Citi, its analysts have retained their buy rating and $24.75 price target on this banking giant’s shares. While the broker believes that the recent spike in coronavirus cases could mean further loan deferments, it isn’t enough to shift its positive view on the investment opportunity with ANZ’s shares. It continues to see value in its shares at the current level. I agree with Citi on ANZ and would be a buyer of them.

Coca-Cola Amatil Ltd (ASX: CCL)

Another note out of Citi reveals that its analysts have retained their buy rating and $9.85 price target on this beverage company’s shares. This follows the release of a trading update by Coca-Cola Amatil last week. It appears pleased with the volume recovery in the ANZ market and suspects volumes could surprise to the upside in the near term. And while it notes that its Indonesian business continues to struggle and has taken an impairment charge, it wasn’t overly surprised by this. While I’m not a huge fan of the company, I do think it could be worth a closer look.

Tabcorp Holdings Limited (ASX: TAH)

Analysts at UBS have retained their buy rating and lifted the price target on this gambling company’s shares to $5.00. According to the note, the broker’s research has shown a material increase in digital betting during the pandemic. Its analysts believe that Tabcorp has won a bit of market share thanks to its promotions. It feels this will offset some of the weakness it is experiencing in other parts of the business. Once again, it’s not a share that I’m naturally drawn to, but it could be worth considering.

More reading

• Buffett buys more bank shares: Should you?
• Why UBS thinks now is the time to be buying this underperforming ASX 200 stock
• Will the iron ore price crash by the end of 2020?
• Tabcorp share price up 5% as CEO and chair succession plan announced
• ASX 200 rises 0.3%, investors bet on Tabcorp

Motley Fool contributor James Mickleboro 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 Top brokers name 3 ASX shares to buy next week appeared first on Motley Fool Australia.

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The spot gold price surged to its highest level since 2011 on Friday and a new tailwind is likely to lift it above its all-time record high.

The precious metal jumped another 0.8% at the end of the week to US$1,902 an ounce and is now less than US$20 away from its peak of US$1,921 per ounce set nine years ago.

While many of the factors supporting the safe haven asset was touched on many times before, the tailwind that’s drove the gold price above the psychologically important US$1,900 level isn’t so obvious.

Gold finds a new friend

This is the weakening greenback with the US Dollar Index (a measure of the US dollar against a basket of other major currencies) slumping to a two-year low.

The US Dollar Index slipped 0.4% on Friday to 94.35 and has fallen over 8% since the height of the COVID-19 market meltdown in March.

The other big drivers of the gold price are well documented. Record low interest rates and money printing by central banks, including Australia and the US, have created a favourable backdrop for the commodity before the exchange rate gave it the extra push to retake US$1,900.

Tailwinds to persist

What’s more, the US dollar tailwind isn’t abating. You don’t need to be a technical analyst to see that the chart is indicating the path of least resistance is down for the almighty dollar – at least in the near-term.

US Dollar Index (DXY) – 1 Year

Source: Market Watch

The inability of the US to control the rate of COVID-19 infections and deaths is behind the bout of US dollar weakness. No one believes this situation is about to change anytime soon and this means its currency will remain under pressure.

Lack of safe havens to fuel gold’s bull run

The US dollar is the world’s reserve currency and a safe haven for nervous investors. But when the problems in the US are this deep, investors aren’t willing to shelter under the dollar.

This has implications for the other globally recognised “risk-free” asset – US government bonds. While the value of these bonds will likely hold up well in any crisis, investors could still be nursing a loss on the currency unless they hedge this risk. This adds an additional layer of cost and complexity.

A similar thematic is emerging for the Japanese yen with the risk of a second wave outbreak emerging in the country.

Gold likely to keep running through 2021

Gold is standing tall as the world runs out of safe haven assets, and I don’t believe this uptrend will turn until the US dollar regains its risk-free status. This probably won’t be until sometime in 2021 or 2022.

What this means is that gold is likely to breach the US$2,000 level – something that I forecasted in April. If it does, it may very well stay above that bullish level for much of the next 12 to 24 months.

ASX gold miners on consensus upgrade cycle

As most analysts aren’t forecasting the yellow metal to break and hold above its 2011 record high, this could prompt them to upgrade their earnings forecasts and valuation for ASX gold miners.

This could see major producers like the Newcrest Mining Limited (ASX: NCM) share price, the Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price rise further in FY21.

The only thing is that investors may now favour ASX gold stocks with overseas mines instead of local operations.

When gold was rising before the COVID-19 outbreak, it was doing so while the Australian dollar was falling. This gave local gold mines an extra boost as their cost base is denominated in the weakening Aussie.

The opposite is now happening in the second phase of the gold price rally.

More reading

• How to take advantage of the surging gold price
• Brokers name 3 ASX 200 shares to buy right now
• ASX 200 sinks 1%: IAG cancels final dividend, tech shares tumble, IGO jumps
• Why Afterpay, Evolution, IAG, & Vicinity Centres shares are dropping lower
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Brendon Lau owns shares of Evolution Mining Limited and Newcrest Mining Limited. Connect with me on Twitter @brenlau.

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

The post What’s really driving the gold price to record highs puts ASX gold miners on upgrade path appeared first on Motley Fool Australia.

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With many savings accounts offering base interest rates of just 0.05% at present, I think investors are better off looking to the share market for a source of income.

But which ASX dividend shares should you buy? Three top ASX dividend shares I would buy are listed below:

BWP Trust (ASX: BWP)

The first ASX dividend share to consider buying is BWP Trust. It is the largest owner of Bunnings Warehouse sites in Australia and has a total of 68 locations leased to the hardware giant. Given the quality of the Bunnings brand and its positive growth outlook, I believe it is a great tenant to have. Furthermore, I feel the risk of rental defaults or stores closures in the near term is very low. In light of this, I feel BWP is in a position to continue growing its income and distribution at a solid rate for the foreseeable future. Based on the latest BWP share price, I estimate that it offers investors a generous 4.7% FY 2021 distribution yield.

Rio Tinto Limited (ASX: RIO)

Another ASX dividend share to consider buying is this mining giant. I believe Rio Tinto is well-placed to deliver bumper free cash flows thanks to its strong iron ore production and the high prices the steel making ingredient is commanding. Positively, due to the strength of Rio Tinto’s balance sheet, I expect almost all of its free cash flow will be returned to shareholders in the near term. In light of this and based on the current Rio Tinto share price, I estimate that it currently offer a forward fully franked dividend yield of at least 5%.

Rural Funds Group (ASX: RFF)

A final dividend share to buy is Rural Funds. It is a leading agriculture-focused property company with a collection of quality assets leased to some of the biggest names in the industry. Another attraction for me is its long term tenancies. These have been designed to allow the company to consistently increase its distribution at a solid rate each year over the long term. For example, in FY 2020 it plans to pay 10.85 cents per share and in FY 2021 it intends to pay shareholders 11.28 cents per share. Based on the current Rural Funds share price, the latter equates to a generous 5.5% yield.

More reading

• Will the iron ore price crash by the end of 2020?
• 4 trends to invest in before August earnings season
• 2 of the best ASX dividend shares to buy now
• BHP’s share price tumbles with this other ASX miner after being hit by broker downgrades
• I would buy Coles and these ASX dividend shares right now

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. 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 Beat low interest rates on savings accounts with these ASX dividend shares appeared first on Motley Fool Australia.

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With a new month upon us, I think it could be a good time to take a look at your portfolio and see if it needs some adjustments.

If you’re looking for some growth shares to buy, then the three listed below could be great options in August. Here’s why I like them:

Altium Limited (ASX: ALU)

Altium is a printed circuit board (PCB) design software provider which I think would be a great long term option for investors. As PCBs are found inside almost all connected devices, I believe Altium is a great way to gain exposure to the Internet of Things boom. A boom which I expect to accelerate when 5G internet becomes the norm. The explosive speeds of 5G internet should allow more and more everyday devices to connect to the internet, which could lead to an increase in licenses for its award-winning Altium Designer software. The launch of its cloud-based Altium 365 offering also looks likely to be a key driver of growth in the coming years.

Appen Ltd (ASX: APX)

I think this global leader in the development of high-quality, human-annotated training data for machine learning and artificial intelligence would also be a great long-term investment option. Appen has been growing at an impressively strong rate in recent years thanks to the growth in machine learning and artificial intelligence and its leadership position in data annotation. As this market is expected to continue growing materially over the next decade, I feel Appen is well-placed to continue its strong form long into the future.

ResMed Inc. (ASX: RMD)

Another growth share to consider buying in August is ResMed. I’m a big fan of this sleep treatment products developer and believe its shares could provide outsized returns for investors over the next decade. This is thanks to the quality of its products and its growing addressable market. In respect to the latter, management estimates that there are 1 billion people impacted by sleep apnoea worldwide. However, the vast majority of these sufferers are currently undiagnosed and could be at risk of life-threatening conditions. I expect the growing education around sleep disorders to lead to more diagnoses and support ResMed’s growth over the coming years.

More reading

• Here are easy ways to diversify your ASX portfolio
• Brokers name 3 ASX 200 shares to buy right now
• ASX 200 sinks 1%: IAG cancels final dividend, tech shares tumble, IGO jumps
• 5 things to watch on the ASX 200 on Friday
• Why I would buy Appen and these ASX tech shares right now

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 3 fantastic ASX growth shares to buy in August appeared first on Motley Fool Australia.

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Although it can be tempting to construct a portfolio filled to the brim with high growth tech shares, it is worth remembering that having too much exposure to one particular sector can be a very bad thing for a portfolio.

The travel sector is a prime example of why this is the case. Over the past few years the travel sector has been a great place to invest. The likes of Corporate Travel Management Ltd (ASX: CTD) and Webjet Limited (ASX: WEB) had generated mouth-watering returns for investors over the last five years, prior to the pandemic.

But then out of nowhere their business models were broken, through no fault of their own, and their shares are now trading at levels not seen since 2015. That’s five years of gains gone in the blink of an eye.

If you had a portfolio with significant weighting to the travel sector, you would be severely underwater right now compared to those with more balanced portfolios.

How can you diversify?

Buying companies with limited correlations is one way to diversify.

For example, the drivers of growth for electronic design company Altium Limited (ASX: ALU) and supermarket giant Coles Group Ltd (ASX: COL) are unrelated.

Given their positive outlooks, building a portfolio around these two could be a good start.

Alternatively, you could diversify your portfolio very quickly by investing in exchange traded funds.

The Betashares Nasdaq 100 ETF (ASX: NDQ) is one of my favourite exchange traded funds. It gives investors exposure to 100 of the largest, non-financial businesses on the NASDAQ exchange.

These include countless household names such as Amazon, Apple, Costco, Netflix, Starbucks, and Google parent, Alphabet. Though, given its high weighting to the technology sector, you might want to balance it out with other shares or exchange traded funds.

Another to consider is the iShares Global Healthcare ETF (ASX: IXJ). This exchange traded fund gives investors access to many of the biggest healthcare companies in the world.

This includes CSL Ltd (ASX: CSL), Johnson & Johnson, Novartis, Ramsay Health Care Limited (ASX: RHC), and Sanofi. I think it could generate strong returns for investors over the next decade due to the increasing demand for healthcare services because of ageing populations and increased chronic disease burden.

Overall, I feel if you follow these steps, you’ll maximise your returns over the long run and lower the risk of shock events wiping out your gains.

More reading

• 5 steps to start investing in ASX shares
• How to become a millionaire with ASX shares starting with $0
• Why I would buy Ramsay and this ASX blue chip share
• A top ASX dividend share to buy next week
• Fed up of dividend cancellations? Buy these safe ASX dividend shares

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BETANASDAQ ETF UNITS. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended BETANASDAQ ETF UNITS and Ramsay Health Care 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 defence shares have attracted global attention as international tensions increase. The Prime Minister recently said we are entering a world that is more uncertain than it was in February. Accordingly, Australia has announced a range of spending initiatives to better secure our country’s defences over the next decade. Furthermore, we are also seeing additional defence spending activity elsewhere around the world.

One example is the Japanese Memorandum of Understanding that formalises Australia and Japan’s plans to work more closely together on space and defence sectors. A second example is the US$50 million in funding from the United States government to Austal Limited (ASX: ASB). This is to maintain, protect, and expand US domestic production of steel shipbuilding capabilities for capital projects over the next 24 months. Consequently, we are seeing a mini-boom in ASX defence shares. On that note, let’s take a look at three defence shares that have done very well recently.

3 surging ASX defence shares 

DroneShield Ltd (ASX: DRO)

DroneSheild has made two strong announcements this week, taking its market capitalisation to $40.39 million. The company specialises in drone security technology and is a world leader in the field. Earlier this week, it announced new contracts with both the US defence forces and the European Ministry of Defence. This builds upon an already expansive client list which also includes the European Union Police.

Dronesheild saw its share price rise by 33.33% across this week. However, it is still down by over 40% in year to date trading due to the coronavirus market crash. I think this ASX defence share is likely to see an increased level of sales due to the proven capability of its product.

Orbital Corporation Ltd. (ASX: OEC)

Orbital has enjoyed a share price increase of only 0.79% this week. However, over the past month the share price has risen by approximately 73%. The company provides propulsion systems for small unmanned aircraft or drones. In the past month, the company had a visit from the Minister for Defence, the Hon Linda Reynolds, reminding the market that Orbital is already an accomplished defence contractor.

In addition, this ASX defence share received a new contract with Northrop Grumman to design and develop a hybrid propulsion system. This will combine an electric motor with the company’s flight-proven engine. The company has a current valuation of $99.31 million.

Xtek Ltd (ASX: XTE)

Xtek is a very interesting company for me. Its share price is level for this week but up by 12.7% over the past month. The company has developed a patented technology called XTclave for curing and consolidating composite materials. Xtek has already installed an industrial sized machine in its Adelaide premises. This is large enough to support ~$40 million in revenues per year, and Xtek is also looking to install another one at its recently acquired US base.

This technology is used to produce a range of products, including; armour, lightweight tactical and human carriage equipment, robotic mechanical systems and unmanned craft. In the past 2 months, this ASX defence share has announced additional contracts with the Finnish Defence Forces and the Australian Defence Forces as well as a grant from the Australian Space Agency. 

Foolish takeaway

Australia has a good number of technologically advanced defence contractors. While most of us focus on Austal and Electro Optic Systems Holdings Limited (ASX: EOS) there are also many smaller ASX defence shares that have developed technologies other countries are willing to pay for.

More reading

• Escalating US-China tensions are sending these ASX stocks jumping higher today
• 2 fast-growing mid cap ASX shares that could be destined for big things.
• DroneShield share price soars 12% on European order
• DroneShield share price surges 25% on US Air Force contract
• Orbital share price soars by 19%

Daryl Mather owns shares of Austal Limited and Electro Optic Systems Holdings Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Austal Limited, Electro Optic Systems Holdings Limited, and Orbital Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings 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 3 surging ASX defence shares to buy next week appeared first on Motley Fool Australia.

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While there are many cheap stocks available to buy right now, some investors may be considering other opportunities such as the housing market. Low interest rates that could persist for a prolonged period of time could mean that house prices perform relatively well in the coming years.

However, with the stock market offering greater diversification potential, lower valuations and a solid track record of recovery from bear markets, it could be a better means of improving your financial prospects.

Diversification potential

Buying a portfolio of cheap stocks is a relatively straightforward option for almost any investor due to the low cost of sharedealing. Online sharedealing has become increasingly prevalent over the past decade, and features such as regular investing opportunities mean that commission costs can be exceptionally low.

As such, reducing overall risks within a portfolio of shares is much easier than it is within the property sector. Due to the high cost of owning just one property, in terms of the amount required for a deposit, many investors may end up with a small number of houses or apartments in their portfolios. This could lead to disappointing returns should there be a problem, such as unexpected repairs, with even just one of their properties.

By contrast, a portfolio of cheap stocks could offer less risk. Even if one company reports disappointing results, this may be mitigated by strong performances from other holdings within a portfolio. This may lead to higher returns in the long run than a more concentrated portfolio of properties.

Exceptionally cheap stocks

The recent market crash means that there may be a larger number of cheap stocks available at the present time than would normally be the case. In some sectors, it is possible to buy high-quality businesses at prices that are significantly below their long-term averages. This suggests that they offer wide margins of safety, and could deliver impressive total returns in the coming years.

Meanwhile, house prices may be less attractive than stocks from a value perspective. House prices have moved higher over the past couple of decades, and may not yet reflect a changing economic outlook. As such, there may be less scope for capital growth than there is within the stock market.

Recovery prospects

Furthermore, the stock market has an excellent track record of recovery from its bear markets. In fact, it has always produced new record highs after each of its past downturns. This suggests that investors who are able to buy cheap stocks now while the wider market is at a relatively low ebb could profit from a likely recovery.

This opportunity may not necessarily be available within the housing market due to the high valuations that are currently present. Therefore, now may be the right time to buy undervalued shares, rather than seeking to build a property portfolio.

More reading

• Here are easy ways to diversify your ASX portfolio
• 3 surging ASX defence shares to buy next week
• Should fixed-interest investments be part of your ASX share portfolio?
• 5 steps to start investing in ASX shares
• Emergency funds: Are they still important?

Motley Fool contributor Peter Stephens 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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