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Value shares will easily outperform growth stocks over the next 10 years, according to Vanguard’s Investment Research Group.

The conclusion is drawn in a paper from the group titled Value versus growth stocks: The coming reversal of fortunes released earlier this month.

“We expect value to outperform growth over the next 10-year period by as much as 5% to 7% per year, and perhaps by even more over the next 5 years,” the report read.

The research was based on US markets, which the fortunes of Australian equities closely correlate to.

The four authors, Kevin DiCiurcio, Olga Lepigina, Ian Kresnak and Dr Joseph Davis, acknowledged that growth has completely outplayed value over the last decade. 

But this is historically unusual.

“Over the last 10 years, US growth stocks have outperformed US value stocks by an average 7.8% per year,” said the report.

“[However,] the value factor, as defined by Fama-French, has on average outperformed growth over 10-year time horizons going back to 1936.”

Their analysis showed legitimate reasons for growth’s dominance in recent years — low inflation, near-zero interest rates, corporate profits growth, and share market volatility.

But now they believe that narrative has been “oversold” — and it’s time for value’s revenge.

Post-COVID return to ‘fair value’

The tide is about to turn, say the report’s authors.

“Growth and value appear to be at the upper and lower bounds of their respective fair value to market estimates,” the report read.

“Based on the historical performance of the models, deviations from fair value typically revert to fair value over time.”

The other big driver is the rise of inflation back to more historically standard levels.

“If the [post-COVID] recovery were to stall meaningfully (or reverse) and neither inflation nor corporate profits accelerated, there is a risk that growth could continue to outperform,” the study stated.

“We expect a gradual rise in fair value over the next 5 to 10 years as long-term inflation measures begin to normalise to our 2% target, real interest rates rise, and corporate profit growth rates increase amid the COVID-19 recovery.”

Return forecasts for value and growth shares

Over the next 5 years, the Vanguard study predicts value stocks will outperform growth by between 9% and 13%. That will moderate to 5% to 7% winning margin over the next decade.

“Investors who allocate their entire equity portfolio to value can expect average annualised returns of 4.3% to 7.3% over the next decade, versus 3% to 5% for the broad US equity market.”

The big question mark over this forecast is how much longer the market will reward growth companies for research and development spending. 

But the report’s authors reckon this has already been priced in.

“While we do not have an informed view on the expectation for future R&D spending by growth companies, we can say that current valuations of growth relative to the broad market are already priced to reflect the most optimistic corners of the distribution,” the study read.

“Therefore, it is not unreasonable to believe that, even if investors continue to reward this behaviour, less upside potential remains.”

More reading

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• Why Ford couldn’t keep Tesla shares from popping today
• Top brokers pick these 3 underperforming ASX shares as their latest buy idea
• NIB (ASX:NHF) share price higher on ACCC update
• Bitcoin bounces back, but is it smooth sailing from here?

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Australia’s top brokers have been busy adjusting their estimates and recommendations once again. This has led to the release of a number of broker notes.

Three broker buy ratings that have caught my eye are summarised below. Here’s why brokers think these ASX shares are in the buy zone:

Appen Ltd (ASX: APX)

According to a note out of Ord Minnett, its analysts have retained their buy rating and $24.75 price target on this artificial intelligence data services company’s shares. This follows the release of a trading and restructure update earlier this week. Ord Minnett was pleased to see the company reaffirm its earnings guidance for FY 2021. It was also happy to see the company restructure its business in a way that will provide more clarity in relation to what is driving its growth. The Appen share price is fetching $13.46 today.

Flight Centre Travel Group Ltd (ASX: FLT)

A note out of the Macquarie equities desk reveals that its analysts have retained their outperform rating and $17.50 price target on this travel agent’s shares. This follows the release of recent updates from travel peers such as Qantas. And while it suspects that lower travel agent commissions could weigh on its recovery, it believes valuation support is emerging. It also notes that it remains sensitive to positive news flow as borders reopen and vaccines roll out. As a result, it holds firm with its positive view on the company. The Flight Centre share price is trading at $14.88 on Friday.

Qantas Airways Limited (ASX: QAN)

Analysts at Morgan Stanley have retained their overweight rating and $5.90 price target on this airline operator’s shares following its market update. According to the note, the broker was pleased to see that domestic capacity is expected to increase beyond previous expectations during the fourth quarter. And while its guidance for the full year fell short of expectations and its international operations look set to drag on its FY 2022 results, the broker sees enough value in its shares to maintain its overweight rating. The Qantas share price is trading at $4.73 this morning.

More reading

• Is the Flight Centre (ASX:FLT) share price good value?
• 5 things to watch on the ASX 200 on Friday
• ASX 200 jumps, Qantas flies, Nufarm rises
• Why Afterpay, EML Payments, Qantas, & Sezzle are charging higher
• Appen (ASX:APX) share price rises further following investor presentation

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Ford Motor Company (NYSE: F) stock enjoyed a modest tailwind Thursday, closing the day up 3.1% after announcing that its new electric F-150 Lightning pickup truck will go on sale next year for the low, low price of $39,974. That’s just $74 more than Tesla (NASDAQ: TSLA) says it will sell its Cybertruck for, and with Ford beginning sales in 2022 — but Tesla not saying when its Cybertruck will arrive — Ford’s F-150 Lightning might even beat Cybertruck to market. 

And yet, while it was Ford that made the headlines, it was Tesla stock that went up more today: 4.1%.

So what

So how did Tesla steal Ford’s thunder? (I mean, its Lightning?)

I’ve got a couple of theories. The most likely is that investors are viewing Ford’s electric F-150 bet as validating Tesla’s idea of selling electric pickup trucks, and as a sort of backhanded endorsement that Tesla was right all along about the future of cars — and trucks — being electric.

A second factor possibly helping out Tesla investors is that famed tech investor Cathie Wood snapped up another 69,508 shares of Tesla today for three of her ARK investment funds. Combined with the more than 47,000 shares Wood purchased the day before, that makes for about 116,500 Tesla shares she’s added to her holdings this week — the first such buying she’s engaged in since April.  

Now what

After a month of nearly continuous selling of Tesla stock on the market, driving shares of Elon Musk’s car company down nearly 25%, investors may be taking Wood’s buying as a “green light” signal that it’s safe to get back in the water again.

And not even a press release from Ford could stop this rally.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• 56% of Aussies think Elon Musk invented Bitcoin
• Here are the US shares ASX investors were buying last week

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Value investors will increasingly need to look at the ASX dogs of FY21 to find bargains for the new financial year, and three stand out as they are named the latest buys by leading brokers.

The fact is, the hunt for attractively-priced ASX shares is getting more difficult. The S&P/ASX 200 Index (Index:^AXJO) is sitting on a stellar gain of nearly 30%.

If it closes at these levels on June 30, it will mark its best performance in years.  

The ugly ducking could be a swan in FY22

Those sifting through the FY21 laggards for gems to pick up for the next 12-months might want to look at the A2 Milk Company Ltd (ASX: A2M) share price.

You’d be hard pressed to find a bigger dog. The A2 share price has taken a shocking shellacking and has shed more than 70% of its value over the past year.

But UBS is growing increasingly confident in its turnaround and reiterated its “buy” recommendation on the A2 share price.

Buy this ASX share as its glass is half full

“Average price for best seller a2 Platinum SKUs on major direct CBEC online platforms increased from CNY205/tin to CNY214/tin in April,” said UBS.

“At the same time, a2 Platinum share of best seller declined from 18% to 15% in April, but still remains above pre COVID-19 levels of 13%.

“We have also seen a sequential lift in Australian distributor pricing proxy for a2 Platinum. Collective, this is consistent with our analysis pointing to significant channel inventory tightening in 2HFY21.”

The broker’s 12-month price target on the A2 share price, which is also listed on the New Zealand stock exchange, is NZ$13.50.

Green shoots of earnings recovery

Meanwhile, the Nufarm Ltd (ASX: NUF) share price is another FY21 underperformer that got a tick of approval from Morgans.

The broker repeated its “add” recommendation on the Nufarm share price after the seeds and fertiliser group posted a better-than-expected result.

“NUF’s 1H21 result materially beat expectations as sales occurred earlier than normal given favourable operating conditions and COVID uncertainty/supply chain disruptions,” said Morgans.

“The strong result (EBITDA up 118% on pcp) was led by its ANZ, Europe and Seed Technologies businesses.”

The broker’s 12-month price target on the Nufarm share price is $6.50 a share.

Spoon full of sugar makes this ASX share a buy

One of the latest “buy” picks from Macquarie Group Ltd (ASX: MQG) is the Australian Pharmaceutical Industries Ltd (ASX: API) share price.

While the API share price is holding a 7% gain over the past year, that’s still way behind the broader market.

But Macquarie thinks this could soon change after it signed a non-exclusive deal to distribute Pfizer’s PBS medicines.

Pfizer distributes its medicines to over 5,600 pharmacies in Australia and the deal does not include Pfizer’s COVID-19 drug. But Macquarie thinks this could change if the government enlists the help of pharmacies to administer the vaccines.

Earnings upgrade

“API expects the additional volume provided by Pfizer Australia’s agreement will result in an uplift in EBIT of ~$4m p.a., which is an increase of +4.8% on our current FY22 estimates to ~$88m,” said Macquarie.

“API’s agreement with Pfizer’s will be generating a higher margin than its existing pharmacy distribution business.”

The broker’s 12-month price target on the API share price is $1.45 a share.

More reading

• Why this expert is urging you to buy these ASX defensive shares even in a bull market
• ASX 200 jumps, Qantas flies, Nufarm rises
• Lower ASX 200 shares? The ground is moving on interest rates
• 2 excellent ASX 200 blue chip shares to buy
• ASX 200 up 0.95%: Qantas update, Nufarm’s profits surge

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The NIB Holdings Limited (ASX: NHF) share price is pushing higher on Friday following the release of an update.

At the time of writing, the private health insurer’s shares are up almost 1% to $6.10.

What was announced?

This morning the Australian Competition and Consumer Commission (ACCC) announced that it is planning to authorise Honeysuckle Health and NIB to form and operate a health services buying group for five years.

However, the proposed authorisation will include a condition limiting the size of the buying group, and the ACCC is now seeking submissions on its draft determination.

What are NIB’s plans?

The Honeysuckle Health and NIB buying group intends to collectively negotiate and manage contracts with healthcare providers on behalf of private health insurers and other healthcare payers who join the group.

The ACCC considers the buying group is likely to result in public benefits by providing more choice for insurers and other healthcare payers, increased competition between buying groups, and giving participants more input into contracts and better information.

ACCC Commissioner Stephen Ridgeway said: “Our preliminary view is that authorising nib and Honeysuckle Health to form a buying group delivers public benefits that outweigh any potential adverse effects on competition,”

“Increased competition between buying groups is likely to incentivise the buying groups to provide better value to health insurers, which may reduce upward pressure on premiums for their members.”

Though, the regulator doesn’t want the buying group to become too powerful.

Mr Ridgeway explained: ”Although we intend to authorise this arrangement, we would be concerned about the potential effect on competition if the group was to become too large.”

“Many interested parties, including medical specialists, made submissions opposing the authorisation, and this led nib and Honeysuckle to make changes to limit the size of the group. The ACCC’s preliminary view is that these changes and the condition limiting participation in the buying group are sufficient to address these concerns,” he concluded.

More reading

• The ASX healthcare giant ready to explode: fundie
• NIB (ASX:NHF) share price wobbles after ACCC drops court case
• ASX healthcare shares could be next to be hit by the digital disruption
• Here’s why the NIB (ASX:NHF) share price is on the rise today
• ASX 200 Weekly Wrap: Shares have average week but a great month

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Bitcoin (CRYPTO: BTC) may have found itself a bottom after a sudden crash on Wednesday wiped out as much as 30% of its value. After briefly touching US$30,000 around 11pm on Wednesday, Bitcoin bounced back a coincidental ~30% to US$39,700 at the time of writing.

Other popular tokens including Dogecoin (CRYPTO: DOGE) and Ethereum (CRYPTO: ETH) have also recovered a respective 90% and 60% off lows.

China’s crackdown on crypto could be a driving catalyst behind the steep selloff, alongside Elon Musk’s decision to pull the plug on Bitcoin payments at Tesla Inc (NASDAQ: TSLA) last week.

As it’s common for crypto trading platforms such as Coinbase Global Inc (NASDAQ: COIN) to offer leverage to investors, the sudden pullback saw a surge in liquidations. At the height of the selloff, more than ~840,000 traders were liquidated to an amount totalling some US$9 billion.

Cryptocurrencies are likely digesting the implications of China’s tough laws on cryptocurrency and Musk’s stance on the environmental implications of Bitcoin mining and transactions.

Past recoveries

Bitcoin has had much larger selloffs in the past, but the digital asset somehow always managed to bounce back.

In some cases, the recovery has been almost V-shaped. Its February 2020 COVID-19 driven selloff wiped out more than half its value from US$10,300 to US$4,700 between 15 February and 12 March. Just two months later, prices had recovered back to the US$9,000 level.

But the 2017 to 2019 crypto bear market tells a much more harrowing story. After reaching a peak of almost US$20,000 in late 2017, Bitcoin, alongside its cryptocurrency peers, plunged more than 80%.

In 2018, news such as rumours of South Korea preparing a ban on cryptocurrency trading, Japan’s largest cryptocurrency OTC market getting hacked US$530 million, and social media platforms including Facebook, Google and Twitter banning advertisements on initial coin offerings sent Bitcoin spiralling to as low as US$3,160 by December 2018.

For investors that bought the peak or initial dips, it would have taken almost 3 years to break even.

More reading

• Forget bitcoin, why it might be time for gold to shine
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• Bitcoin price woes continue as China cracks down on cryptocurrency
• 56% of Aussies think Elon Musk invented Bitcoin
• If Bitcoin investing isn’t risky enough for you, try this

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The Airtasker Ltd (ASX: ART) share price won’t be going anywhere on Friday.

This morning the online marketplace for local services requested a trading halt.

Why is the Airtasker share price in a trading halt?

Less than two months since completing its initial public offering (IPO) on 23 March and raising $83.7 million at $0.65 per new share, Airtasker is tapping the market again for funds.

According to the announcement, the company is seeking to raise $20.7 million via a capital raising.

Airtasker is aiming to raise these funds at $1.00 per new share, which represents a discount of approximately 7.5% to its last close price. This will be undertaken via a fully underwritten placement to institutional, professional and sophisticated investors.

Why is Airtasker raising funds?

Airtasker is raising capital in order to fund an acquisition in the United States and to further invest in its international growth plans. The latter includes its plans to expand into key city markets in the United Kingdom.

The release explains that the company has signed an agreement to acquire San Francisco-based Zaarly for ~$3.4 million. It is a local services marketplace with more than 597,000 registered users and 900+ verified service providers. Management believes the acquisition will jump start its expansion in the massive US market.

Furthermore, Zaarly’s highly experienced team of marketplace product, engineering, and operations executives will continue to be led by CEO Bo Fishback, who joins Airtasker to lead the US market expansion.

What’s next?

The Airtasker share price is expected to remain in its trading halt until the earlier of the commencement of trade on 25 May and the completion of its placement.

At the time of writing, the Airtasker share price is up a sizeable 66% since hitting the ASX boards in March. This is all the more impressive given the recent weakness in the tech sector.

More reading

• The case for and against Airtasker (ASX:ART) shares
• Seven West (ASX:SWM) share price wobbles on market update
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• ASX 200 rises, Kogan jumps, gold miners sold off
• Why Airtasker, Appen, Downer, & Kogan shares are charging higher

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Debate during this bull market has focused on whether to buy high growth ASX tech shares or cyclicals and value shares, but we shouldn’t ignore their forgotten cousins – ASX defensive shares.

That’s the view of Wilsons, which picked a select group of defensives that it believes should be added to your portfolio even in a bull market.

Speaking of which, we can expect lots of bullish sentiment this morning. Our market looks poised to extend yesterday’s big bounce thanks to gains on Wall Street.

ASX defensive shares are a bull in a china shop

Risk appetite is making a comeback after jitters about inflation and overstretched valuations knocked the S&P/ASX 200 Index (Index:^AXJO) about.

This is an interesting time to be talking about defensive shares as they tend to be better suited for periods of bearishness or great uncertainty.

This is particularly so as the ASX 200 is sitting on close to 30% gains over the past year. Unusually, we have not seen a meaningful market sell-off of 5% or more during this period.

Can’t predict timing for a market correction

“It seems odd to be talking about defensive exposures when the outlook for global growth and corporate earnings is one of the strongest we have seen in years,” said Wilsons.

“Whether a pull-back of 5-10% will emerge is unclear, but it is certainly possible given the almost straight-line rally of the past year.”

It’s anyone’s guess if and when a significant market correction will hit the ASX. But at a minimum, Wilsons believes we are heading for a period of “more normal returns”.

Why this is the time to take out a bit of insurance

The broker pointed out that its base case scenario sits alongside the risk of a big correction, which can be triggered by several factors.

This includes inflation, central banks tapering stimulus, rising bond yields, the ever-present COVID-19 threat and geopolitical conflict.

We also can’t rule out a spike in oil prices and the risk that corporate earnings won’t live up to lofty expectations.

ASX defensive shares to buy today

For these reasons, this is the time to be looking at a short list of quality ASX defensive shares that have been overlooked in the tech and value/cyclical rallies of the last 12 months.

There are three ASX defensives that Wilson particularly likes and is on its “focus list” of conviction buys.

These are the CSL Limited (ASX: CSL) share price, Northern Star Resources Ltd (ASX: NST) share price and Telstra Corporation Ltd (ASX: TLS) share price.

Other ASX defensives that the broker also highlighted include the Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) share price, Amcor CDI (ASX: AMC) share price, Coles Group Ltd (ASX: COL) share price and Medibank Private Ltd (ASX: MPL) share price.

More reading

• Can the Commonwealth Bank (ASX:CBA) share price crack $100?
• ASX winners and losers from the Victorian budget
• ASX 200 jumps, Qantas flies, Nufarm rises
• Forget bitcoin, why it might be time for gold to shine
• Lower ASX 200 shares? The ground is moving on interest rates

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An equities fund has reminded punters that earnings growth should never be used to judge the worthiness of a share.

Sydney’s AIM fund has a motto of “Successful investing is done from the perspective of a business owner, not a stock speculator” in choosing which businesses to invest in.

The firm, led by chief investment officer Charlie Aitken, explained why in a whitepaper.

“Growth only creates value for owners if the capital that has been invested to generate it earns a return above the cost of said capital.”

What does ‘return on capital’ mean?

The paper took the example of a small cafe.

Say you were opening a coffee shop that took $100,000 to set up. After the first year of operation, the owner earns $10,000 after maintenance and inventory are taken into account.

During that second year, the first shop continues to return 10% – providing the owner $11,000. But the second cafe is less successful, only returning $5,000.

A 10% return, not bad at all.

This prompts you to open a second cafe in a different suburb for the start of the second year. The expansion store also costs $100,000 to establish.

That’s a total of $16,000 earnings for the second year, which is 60% growth. Sounds amazing!

But in terms of return on capital, year 2 was a dud. The owner ploughed $210,000 into the business and got $16,000 back. 

This is a 7.6% return, which is a lot lower than the 10% after year 1.

“As the example has demonstrated, it is quite possible to generate ‘growth’ without creating a single dollar of ownership value (or, in fact, destroying value),” AIM stated in the whitepaper.

“Investing like a business owner means thinking about the underlying economics and returns of the business, not the year-over-year growth rate that is generated.”

Jackpot: find a business with explosive return on capital

Charlie Munger, who is Warren Buffett’s longtime right-hand man and the vice chair of Berkshire Hathaway Inc (NYSE: BRK.A), agrees investors shouldn’t get seduced by earnings growth.

Munger said in his famous Art of Stock Picking speech that over a long period, it’s unlikely a stock will earn a better return than the earnings of the underlying business.

“If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return even if you originally buy it at a huge discount,” he said.

“Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.”

AIM’s whitepaper stated the critical part of this treasure hunt is that the returns on capital are sustainable.

“This means performing a qualitative assessment of the industry structure and competitive advantages of the business you are invested in.”

AIM plugged some numbers in to test Munger’s assertion. 

Say business A returned 6% of capital per annum for 40 years, and business B returned 18% per year for 20 years.

Even if you bought business A at 7.5 times price-to-earnings ratio and B at 15 times, the returns for the latter are far superior after 20 years.

Compound annual returns after ownership of…
	5 years	10 years	20 years	40 years
Business A	21.8%	13.6%	9.7%	9.7%
Business B	18%	18%	18%	18%
Source: AIM; table created by author

“The critical point when investing from a business ownership perspective – and to be clear, this is no small task – is to own businesses that generate sustainably high returns on capital over the very long term,” the AIM whitepaper read.

More reading

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• ASX tech shares are in a world of pain. There might be more to come…
• Here’s How Warren Buffett Explained Berkshire Hathaway’s Bank Selloff
• Invest like Warren Buffett with this ASX ETF
• Why Robinhood is having a go at Warren Buffett

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The Flight Centre Travel Group Ltd (ASX: FLT) share price was out of form on Thursday.

The travel agent giant’s shares were down as much as 8% at one stage before ending the day with a 2.5% decline to $14.93.

This means the Flight Centre share price is down almost 7% year to date.

Why did the Flight Centre share price tumble on Thursday?

Investors were selling Flight Centre and Webjet Limited (ASX: WEB) shares following the release of an update from Qantas Airways Limited (ASX: QAN).

Although the airline operator revealed a significant improvement in its performance, its comments on travel agent commissions shocked investors.

Qantas advised that it is aiming to reduce its costs of sale by lowering front-end commissions paid to travel agents on international tickets from 5% to 1%. Investors appear concerned that other airlines will follow suit, hitting travel agents hard.

One broker that isn’t concerned by the news is Goldman Sachs.

It commented: “We make no changes to our earnings forecasts on either name [Flight Centre and Webjet] and do not expect this to become a broad-based phenomenon across all airlines, although it remains a key risk factor. We believe that Travel Agents will remain a key link to the airline distribution supply chain and although commission models may be restructured, we do not anticipate a strong permanent margin compression for these players.”

Is this a buying opportunity?

While Goldman Sachs continues to rate Webjet’s shares as a buy, it still isn’t recommending Flight Centre’s shares as a buy. This is despite its price target being well beyond current levels.

According to the note, the broker has retained its neutral rating and $20.00 price target on its shares. Goldman also notes that there are a number of upside and downside risks for investors to consider.

For the former, it sees a faster-than-expected recovery in trading environment, significant market-share gains in the online channel, and travel bubbles as potential upside risks.

Whereas key downside risks to consider are the potential emergence of COVID-19 strains which could make vaccines less effective, further decline in brick-and-mortar travel sales, increased competition in the corporate segment, and industry-wide reductions in travel agent commissions.

Food for thought for investors.

More reading

• 5 things to watch on the ASX 200 on Friday
• ASX 200 jumps, Qantas flies, Nufarm rises
• Why Afterpay, EML Payments, Qantas, & Sezzle are charging higher
• Why Flight Centre (ASX:FLT) and Webjet (ASX:WEB) shares are being hammered today
• ASX 200 up 0.95%: Qantas update, Nufarm’s profits surge

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