Tag: Motley Fool

I firmly believe that making long-term investments in ASX shares is the best way to grow your wealth.

This is because of compounding, which is what happens when you generate returns on top of returns.

It helps explain why a 10% per annum return will turn a single $10,000 investment into $11,000 after one year, then a massive $26,000 after ten years.

But if you’re not comfortable stock-picking, don’t let that put you off investing. Not when there are exchange-traded funds (ETFs) out there to make things easier for you.

ETFs allow investors to buy a collection of shares through a single investment. In many cases, this can provide instant diversification for a portfolio.

But which ETFs could be great options for buy and hold investors? Three that I would buy are listed below. Let’s check them out:

BetaShares Global Cybersecurity ETF (ASX: HACK)

The first ETF that I think could be a great buy and hold option is the BetaShares Global Cybersecurity ETF. Unless you’ve been hiding under a rock, you’ll know that cybercrime is on the rise. This is good news for the cybersecurity leaders included in this ETF, which appear well-placed to benefit from the increasing demand for their services over the long term. Among its holdings are Accenture, Cisco, Cloudflare, Okta, Palo Alto Networks, and Trend Micro.

VanEck MSCI International Quality ETF (ASX: QUAL)

Another ETF that I would buy for the long term is the VanEck MSCI International Quality ETF. It provides investors with access to a diversified portfolio of approximately 300 quality companies from across developed markets around the world (excluding Australia). To be included in the fund, a company needs to have low leverage, high earnings growth rates, and high returns on equity (ROE). Companies that currently tick these boxes and are included in the ETF are Apple, ASML, Microsoft, Nike, Nvidia, and Visa.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

A third and final ETF that I think could be a top buy and hold option is the VanEck Vectors Morningstar Wide Moat ETF. This ETF gives investors access to a portfolio of US-based companies with fair valuations and sustainable competitive advantages. These are qualities that Warren Buffett looks for when investing and given his track record over multiple decades, I think it is well worth following his investment style. Among the ~50 shares included in the ETF are the likes of Adobe, Alphabet, Amazon, Boeing, Constellation Brands, Microsoft, and Walt Disney.

The post 3 ASX ETFs I’d buy and hold for 10 years appeared first on The Motley Fool Australia.

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More reading

• Here are 3 fantastic ETFs for ASX investors to buy and hold this month
• Top ASX ETFs to buy in April 2023
• How I’m building more passive income to retire early
• It’s another day, another all-time high for this Buffett-esque ASX ETF
• 2 amazing ASX ETFs I’d love to buy for my portfolio

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended BetaShares Global Cybersecurity ETF. The Motley Fool Australia has positions in and has recommended BetaShares Global Cybersecurity ETF. The Motley Fool Australia has recommended VanEck Morningstar Wide Moat ETF. 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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One of the most famous investors in the world is Warren Buffett. Over almost six decades, the Oracle of Omaha has smashed the market with incredible returns.

In light of this, it certainly could pay to follow in his footsteps when it comes to your own investing. But how could we copy him?

One thing Buffett is well-known for, is taking a long-term perspective when making his investments. Rather than make short term trades, he buys shares “on the assumption that they could close the market the next day and not reopen it for five years.”

With that in mind, let’s take a look at a few ASX shares that could be great buy and hold candidates today. Here they are:

Breville Group Ltd (ASX: BRG)

Breville could be a top option for long-term focused investors. It is a leading kitchen appliance manufacturer behind a growing portfolio of brands such as Breville, Kambrook, Lelit, and Sage. Goldman Sachs is very bullish on its growth outlook thanks to its international expansion and exposure to the coffee market. It has a buy rating and $22.70 price target on its shares.

IDP Education Ltd (ASX: IEL)

Another ASX share that could be worth considering as a long term investment is IDP Education. It is a language testing and student placement company. Goldman Sachs is also very positive on its long term growth prospects. This is thanks to its leadership position, robust balance sheet, and strong underlying demand for its services. Goldman has a buy rating and $35.70 price target on the company’s shares.

Lovisa Holdings Limited (ASX: LOV)

A final ASX share to buy and hold could be fast-fashion jewellery retailer Lovisa. It could be a top long term investment option due to its bold global expansion plans. Morgans, which is bullish on the company, highlights that “we could be at the start of a period of remarkable expansion.” It has an add rating and $28.50 price target on its shares.

The post Invest like Warren Buffett and buy and hold these ASX shares: experts appeared first on The Motley Fool Australia.

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More reading

• These are the 10 most shorted ASX shares this week
• My top 5 ASX shares to buy and hold forever in anticipation of the bull market
• Morgans names the best ASX 200 growth shares to buy in April
• Top ASX growth shares to buy in April 2023
• Why ASX shares in 2023 are eerily similar to 2019 (and what you should do)

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Idp Education and Lovisa. The Motley Fool Australia has recommended Idp Education and Lovisa. 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 S&P/ASX 300 Index (ASX: XKO) is rising again. But, there are some names that have plunged heavily over the last year or so. This could be a great time to invest if those ASX 300 shares rebound.

Shares don’t necessarily recover just because they’ve gone down. But, if problems are just short-term then it can prove to be a great opportunity to jump on it while investors are pessimistic.

With the three ASX 300 shares that I’m going to write about, I think that they’re not only leaders at what they do, but they’re trading at bargain prices as well.

Baby Bunting Group Ltd (ASX: BBN)

Baby Bunting is a leading retailer of baby products like prams, car seats, toys, blankets and so on.

The Baby Bunting share price has fallen over 50% in the last year. It still has the same store network, it has the same growth plans, and it’s not as though the Australian baby population has dropped by 50%.

Profit did take a hit in the first half of FY23, as the business responded to discounting by competitors. But, I don’t think the sector will be as competitive forever. Even if it is, Baby Bunting’s share price is much cheaper and its expansion plans can help drive its profit and share price higher.

The Baby Bunting share price is valued at 13 times FY23’s estimated earnings and under 9 times FY25’s estimated earnings, according to Commsec. The business could be paying a grossed-up dividend yield of 11%.

Domino’s Pizza Enterprises Ltd (ASX: DMP)

Domino’s is another ASX 300 share that has fallen hard – it’s down 33% in the past year and it’s down 67% from September 2021.

But, I think the company’s future profitability will be stronger than what it reported in the first half of FY23. Its global store network continues to grow. It recently entered into Malaysia and Singapore. The business has a very compelling growth profile in markets like Germany and France.

I think trends like automation and population growth can help Domino’s performance in the markets in that it operates.

Commsec numbers put the Domino’s share price at 32 times FY23’s estimated earnings and 23 times FY25’s estimated earnings with a large profit recovery expected.

Food inflation (hopefully) returning to a normal rate will help improve the economics of the food for customers and Domino’s.

Dicker Data Ltd (ASX: DDR)

Dicker Data describes itself as a technology hardware, software, cloud, access control and surveillance distributor. It has a partner base of over 10,000 resellers across Australia and New Zealand. It distributes products from a number of the world’s most famous technology brands.

The Dicker Data share price has dropped 37% in the last year.

In a recent update, the company said that buying power will “shift back into the end-customer’s hands in 2023 as order backlogs are fulfilled and vendors manufacture new inventory in line with the dynamics of the previous years, with supply expected to outstrip demand.”

According to Commsec, the Dicker Data share price is valued at 19 times FY23’s estimated earnings with a potential grossed-up dividend yield of 7.4%. Dicker Data shares are valued at 17 times FY25’s estimated earnings and a potential grossed-up dividend yield of 9.1%.

The post After big falls, these ASX 300 shares look dirt-cheap! appeared first on The Motley Fool Australia.

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More reading

• Creating a diversified income stream: Top ASX dividend shares to buy today according to analysts
• 2 ASX 200 shares that could be top buys for growth
• Down 60% in 12 months, I’d buy these 2 ASX All Ords shares for the turnaround
• Here are the top 10 ASX 200 shares today
• Bargain hunting: 3 retailer ASX shares that shouldn’t be this cheap

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Baby Bunting Group, Dicker Data, and Domino’s Pizza Enterprises. The Motley Fool Australia has positions in and has recommended Dicker Data. The Motley Fool Australia has recommended Baby Bunting Group and Domino’s Pizza Enterprises. 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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Investing in ASX 200 dividend shares is one way of delivering passive income without having to get a second gig.

Coles Group Ltd (ASX: COL) has a solid record of delivering dividends since it joined the ASX.

Coles, unlike many ASX 200 stocks, has lifted its dividend every year since the onset of COVID-19.

Let’s crunch the numbers on how much you would need to invest in Coles shares to receive a $ 100-a-month passive income.

How many Coles shares would get you $100 a month in dividend income?

Starting with the basics, a monthly income of $100 would equate to an annual passive income of $1200.

Coles paid a record interim dividend of 36 cents per share in the first half of FY23. And in the second half of FY22, Coles paid a final dividend of 30 cents per share.

This means that in the past year, Coles has delivered total dividends of 66 cents per share.

In order to have received $1,200 a year, or $100 a month in passive income, you would need to own 1,818 Coles shares.

Coles shares climbed 0.49% in Wednesday’s trade to finish at $18.62.

Based on this closing price, buying 1,818 Coles shares would cost you $33,851.16.

What now?

Looking ahead, the team at Citi is predicting Coles will pay total fully franked dividends per share of 69 cents in FY2023.

If you wanted to receive $1,200 annually or $100 a month from Coles shares, you would need to own 1,739 Coles shares.

This would set you back $32,380.18 based on the company’s last closing share price.

Coles reported an 11,4% boost in net profit after tax (NPAT) to $616 million in its half-year earnings for FY23 compared to the prior corresponding half.

Morgans is tipping Coles will pay fully franked dividends of 66 cents per share in FY 2023 and FY 2024. This is consistent with the company’s total dividends in the last year.

Coles share price snapshot

The Coles share price has climbed 1.53% in the last year.

Coles has a market capitalisation of about $24.8 billion based on its last closing price.

The post How much would you need to invest in Coles shares to generate a $100 monthly passive income? appeared first on The Motley Fool Australia.

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More reading

• How much do you need to invest to give up work and live only off dividend income?
• If a stock market crash is coming, I want to own these 2 ASX shares
• Why did the Coles share price smash the ASX 200 in the first quarter of 2023?
• Passive income: How much to invest to get $800 per month
• Coles share price climbs following $100 million acquisition

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

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One of the biggest dividend payers on the Australian share market is Rio Tinto Ltd (ASX: RIO).

Each year, the mining giant rewards its shareholders with billions of dollars of dividends. This more often than not means that Rio Tinto shares trade with a dividend yield well ahead of the market average.

The good news is that I believe this will be the case for at least the next couple of years. In fact, I suspect that anyone buying shares today will receive at least a 6% dividend yield in FY 2023 and FY 2024.

Here are three reasons why:

Favourable commodity prices

As a miner, the price of certain commodities will have the biggest impact on Rio Tinto’s earnings, and none more so than the iron ore price. In FY 2022, US$18.6 billion of the company’s US$27 billion EBITDA was derived from its iron ore business. This was underpinned by an average iron ore price of US$97.60 per wet metric tonne. According to a note out of Goldman Sachs this week, its analysts are forecasting average benchmark iron ore prices of US$120 per tonne in 2023 and then US$93 per tonne in FY 2024. If this proves accurate, Rio Tinto’s iron ore earnings should remain strong in the next couple of years.

Production growth

Also supporting its earnings will be its production growth plans. As well as aiming for modest iron ore production growth in FY 2023, the company has plans to grow its alumina, aluminium, and copper production. Goldman Sachs is expecting the latter to increase 8% in FY 2023 and then 5% in FY 2024. And with the broker expecting strong copper prices in the near term, this can only mean good things for the Rio Tinto dividend.

Broker forecasts

It isn’t just me that is expecting the Rio Tinto dividend yield to stay above 6% in the near term. Goldman Sachs has pencilled in fully franked dividends of US$5.33 (A$7.95) per share in FY 2023 and US$5.98 (A$8.92) per share in FY 2024. Based on the current Rio Tinto share price of $121.75, this will mean yields of 6.5% and 7.3%, respectively, for investors.

It is also worth noting that Goldman sees a decent upside ahead for Rio Tinto shares and not just big dividend yields. It currently has a buy rating and a $138.30 price target on them.

The post 3 reasons the 6% Rio Tinto dividend yield looks safe to me appeared first on The Motley Fool Australia.

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More reading

• Here are the top 10 ASX 200 shares today
• Top brokers name 3 ASX shares to buy today
• Buy Rio Tinto shares ahead of BHP: Goldman Sachs
• 5 things to watch on the ASX 200 on Wednesday
• Buy these ASX dividend shares for a big passive income boost: Goldman Sachs

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

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Qantas Airways Limited (ASX: QAN) shares have made a huge recovery from the bottom of the COVID-19 crash. Could the ASX travel share be a future dividend champion for investors?

Of course, it’s worth pointing out that Qantas hasn’t paid any dividends yet post-COVID. However, the cash is flowing to investors in the form of a share buyback at the moment. It’s currently carrying out a $500 million share buyback.

In the FY23 half-year result, it generated statutory net profit after tax (NPAT) of $1 billion, or 53.9 cents in earnings per share (EPS) terms.

Could Qantas shares pay good dividends?

Before COVID-19 hit, the business was doing well. It was actually paying dividends to investors.

It paid a dividend in 2016 and then grew its dividend each year to 2019.

In 2019, the ASX travel share paid an annual dividend per share of 25 cents. If the airline were to pay that again, at the current Qantas share price, it would be a grossed-up dividend yield of 5.5%.

That’s a decent dividend yield for a business, particularly one that’s just getting back to profitability.

Considering the business made statutory EPS of 53.9 cents, a dividend of 25 cents would seem like a reasonable dividend payout ratio.

Estimates on Commsec suggest that the Qantas dividend could be re-instated in FY25. The annual dividend per share could be 22 cents. In FY23 it could make 92.6 cents of EPS and this could rise to $1 by FY25.

At the current Qantas share price, this would value the ASX travel share at 7 times FY23’s estimated earnings and 6.5 times FY25’s estimated earnings.

If Qantas were to make $1 of EPS and pay a 50 cents per share dividend, it would be a grossed-up dividend yield of 11%.

How likely are dividends?

I think Qantas is doing a lot of the right things to perform well on behalf of shareholders. The airline said that its net debt had declined to $2.4 billion by the end of the first half.

The stronger the balance sheet, the more likely that dividends could flow.

I don’t think that Qantas is going to pay a dividend in FY23 as it continues to work on improving the balance sheet after COVID-19.

But, I think that during FY24, there could be a payment of a dividend, or at the very least a mention of a return to paying dividends to shareholders.

As international travel returns to normal levels, I think that Qantas will see attractive levels of profit each year, enabling it to keep growing profit.

Unless Qantas has a great place to invest all of its generated cash, I think it makes sense to send some to shareholders and unlock the franking credits.

Foolish takeaway

I’m not expecting that Qantas is about to become the next Commonwealth Bank of Australia (ASX: CBA) when it comes to dividends. But, with how cheap the valuation is, I think it could pay appealing dividends by the middle of the 2020s.

But, I think the key reason to consider the business is the ongoing strong demand for travel.

The post Qantas shares: Future dividend darlings? appeared first on The Motley Fool Australia.

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More reading

• Is the Qantas share price vulnerable to these ‘serious risks on the horizon’?
• Big Wednesday: 12 ASX 200 stocks cracking new 52-week highs
• Snapped up $8,000 of Qantas shares in 2018? Here’s how much passive income you’ve received
• Why did the Qantas share price soar higher than the ASX 200 in March?
• Qantas shares in the green amid sweet $2m investment

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

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The S&P/ASX 200 Index (ASX: XJO) share Whitehaven Coal Ltd (ASX: WHC) could be one of the biggest dividend payers over the next year and a half.

The ASX coal share is benefiting enormously from the much higher coal prices following the Russian invasion of Ukraine. Countries have been looking for alternative sources of energy away from Russia.

While coal prices may not stay this high forever, the miners involved are reaping the benefits of the current environment.

This high level of profit is helping Whitehaven pay big shareholder payouts. Let’s have a look at the dividend projections for the next couple of years.

Estimated dividends

The last two dividends from Whitehaven amount to 72 cents per share, fully franked. This means the trailing grossed-up dividend yield is 15.3%.

Commsec numbers suggest that the ASX 200 coal share could pay an annual dividend per share of 65 cents in the 2023 financial year. That would be a grossed-up dividend yield of 13.8%.

Then we get to the estimated dividend for FY24. Whitehaven is expected to pay a dividend of 53 cents per share, which translates into a grossed-up dividend yield of 11.25%.

But, these are just the current estimates for the ASX 200 share. Projections can change – dividends are not guaranteed.

Will FY23 be another strong year?

Yesterday, the ASX coal share announced that its managed run-of-mine production is 4.3 million tonnes for the three months to 31 March 2023, which was below plan. The miner said that labour shortages are being felt across the business, with several additional operational constraints at Maules Creek.

The quarter for the three months to 30 June 2023 is expected to deliver an uplift in volumes overall, but lower than expected from Maules Creek in the second half for the ASX 200 share.

Managed ROM coal production for FY23 is now expected to be between 18 million tonnes to 19.2 million tonnes, while the guidance for unit cost per tonne of coal guidance increased by around $5 per tonne to a range of $100 per tonne to $107 per tonne.

Despite that, Whitehaven was able to make $1.2 billion of operating cash flow during the quarter and finish with net cash of $2.7 billion.

However, the weaker production could result in lower-than-expected sales in the next financial year.

The post This ASX 200 share could pay an 11% dividend yield in 2024 appeared first on The Motley Fool Australia.

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More reading

• Why Future Generation, Pilbara Minerals, Platinum, and Whitehaven Coal shares are dropping
• Whitehaven share price tanks 7% on downgraded FY23 guidance
• Here are the top 10 ASX 200 shares today
• 7 ASX dividend shares you can buy for under $10
• BHP share price dips as coal mines catch attention

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

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It’s set to be a very good day for shareholders of Woolworths Group Ltd (ASX: WOW) today. And that’s before we know what the markets will bring us this Thursday. How do we know? Because today is payday for the Woolworths dividend.

As an ASX 200 blue chip share, Woolworths is a well-known income provider. The supermarket giant has been paying solid dividends for decades.

This continues in 2023. Back in February, Woolworths delivered its latest financial report. For the six months to 31 December 2022, Woolies reported $33.17 billion in sales, up a decent 4%. Net profit after tax (NPAT) came out even better at $907 million, up 14% over the prior period.

This enabled Woolworths to announce a 17.9% increase for its first dividend of 2023. Shareholders are in line to bag an interim dividend of 46 cents per share, fully franked. Last year’s interim dividend only measured up to 39 cents per share, so this latest payment is a big deal for the company and for shareholders.

What kind of dividend are Woolworths shareholders getting?

But only shareholders that owned Woolworths shares before the ex-dividend date of 2 March will be receiving this dividend. If you bought your first Woolies shares after that date, you’ll sadly miss out on this round, and you’ll have to wait until the next dividend is declared.

But for eligible investors, there should be a new deposit in your bank account by the end of today. Unless you’ve opted to receive additional Woolworths shares in lieu of cash under the company’s dividend reinvestment plan (DRP) of course.

Yesterday, Woolworths shares closed at $39.51 each, putting its year-to-date gains at a pleasing 19.4%. That Woolworths share price gives the company a trailing dividend yield of 2.51%, or 3.59% grossed-up with those full franking credits.

The post The boosted Woolworths dividend is hitting bank accounts today. Here’s what you need to know appeared first on The Motley Fool Australia.

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More reading

• Brokers say these ASX 200 blue chip shares are buys
• I’m looking for once-in-a-decade opportunities in the stock market recovery
• Is Woolworths ‘the granddaddy of recession-proof stocks’?
• Top defensive ASX shares to buy in April 2023
• Investing in ASX 200 dividend shares? Here’s how I’d aim for $200 per month in passive income

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

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One year ago, in the aftermath of the Russian invasion of Ukraine, the world was in a panic about energy security.

Russia was a huge exporter of gas and oil, and many European nations were dependent on it to heat their homes over freezing winters.

As economic sanctions against Russia kicked in, those countries were forced to look elsewhere to meet their energy needs.

Oil and gas prices, accordingly, skyrocketed.

Why was everyone so interested in uranium last year?

But another consequence of this energy crisis was that it compelled many governments to seek alternate sources of fuel.

One of those is nuclear power, which had gone out of fashion after the 2011 Fukushima disaster in Japan.

All of a sudden, countries like Germany that had mothballed their fission power plants were interested in reviving them.

Of course, that led to tremendous investor interest in uranium producers like Paladin Energy Ltd (ASX: PDN).

The Paladin share price rocketed 37% from January to April last year as the war started. Then it again soared a phenomenal 66% from July to September as Europe worried about how it would endure a bitter northern winter.

Why is no one interested in uranium this year?

However, Paladin stocks have been pretty quiet the last few months.

In fact, the share price has actually dropped 17.1% over the past six months.

So what’s going on?

The first driver is that the oil price fell significantly in the second half of 2022, and has continued to dip lower this year.

This is because rising interest rates around the Western world are slowing down economic activity.

So with energy prices cheaper, the incentive to revive nuclear power, with all the cost that entails, is much lower than it was a year ago.

The second factor is that Europe did not experience the deep freeze that many feared.

Those countries managed to stockpile sufficient gas, at considerable expense, over the course of 2022 to heat homes during the northern winter.

Is Paladin still worth adding to the portfolio?

This short-term halt in Paladin’s rise hasn’t stopped some experts thinking that nuclear power generation has a bullish long-term future.

After all, many Western nations are now determined to not be so reliant on Russia and fossil fuels on a permanent basis.

Last month, Shaw and Partners portfolio manager James Gerrish mentioned that Paladin is a stock to consider buying in dips, if one was willing to tolerate the short-term uncertainties.

“A lot of moving parts are involved when it comes to the uranium price but appetite is building as other energy costs rise as the world strives to move away from fossil fuels,” Gerrish said in a Market Matters Q&A.

“We are bullish [on] uranium moving forward, although when [it] starts to really gain traction is hard to forecast due to the uncertain geo-political backdrop.”

The post Why is no one talking about ASX uranium shares like Paladin Energy any more? appeared first on The Motley Fool Australia.

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

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Former ASX technology darling Xero Limited (ASX: XRO) has taken investors on a wild ride over the past 18 months.

From its November 2021 peak, the software stock more than halved for significant periods in 2022.

But after its new chief executive promised cost cutting and a change in focus to turning a profit, 2023 has seen a revival in Xero’s share price in excess of 31%.

But interest rates are still high and climbing, so is it a false dawn?

Fairmont Equities managing director Michael Gable had some thoughts:

‘Upside risk to margin expansion’

Of course, a changed strategy to cost cutting and profit-making does mean Xero’s former mission to grow at all costs will take a back seat.

That’s not worrying Gable though.

“While there are investor concerns about the pace of subscriber growth under a leaner cost structure, we see scope for a further re-rating in the shares over the short to medium term,” Gable said on the Fairmont blog. 

“There is upside risk to margin expansion beyond FY23 given that the company has several options available to dial down expenses in geographies/capabilities where revenue may be impacted.”

Also, in this climate of inflation, Xero has an important lever to pull that’s not available to every business.

“Xero retains strong pricing power, given the structural tailwinds driving cloud accounting adoption globally, that can continue to mitigate any impact from weaker subscriber growth, which is currently only limited to the UK and North American markets.”

As relieved Australian mortgage holders saw just before Easter, interest rate rises seem to be nearing the end.

“The stabilising interest rates backdrop and improving US inflation data are likely to support a rotation back into high-quality growth stocks like Xero in the immediate term.”

Xero share price ‘still at a significant discount’

But after such a spectacular rise year to date, are Xero shares still good value if buying now?

It’s a “yes” from Gable.

“Notwithstanding the recent recovery in the shares, at current levels, Xero is trading on a 1-year forward EV/sales multiple of ~9x,” he said.

“This is still at a significant discount to the 6-year average of ~12x and at the low end of the trading range over this timeframe.”

Technically, the Xero share price has broken through several upward barriers over the past five months.

“The gap up in early March on strong volume looks like a ‘breakaway gap’ and Xero should now trend higher.”

The post The ASX 200 tech stock to buy now before a massive revival appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. 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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