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There are some small cap ASX shares that are growing revenue rapidly and the share prices has been rising too after the COVID-19 crash.

Smaller businesses may have the potential to grow more over time compared to bigger businesses because they’re starting from a much smaller base.

The below two businesses are growing really quickly and could be worth watching:

Sezzle Inc (ASX: SZL)

Sezzle is one of the larger buy now, pay later businesses on the ASX with a market capitalisation of close to $1 billion.

Just like the other companies in the sector, it is experiencing enormous growth.

The small cap ASX share recently released its FY20 result in reporting season.

Underlying merchant sales (UMS) went up 250.8% to $1.08 billion, with average monthly UMS increasing to $90.2 million.

Total income went up 272.1% to $74.3 million. Total income grew faster than UMS because the margin went up 39 basis points to 6.9%. The total income is driven primarily by merchant fees, which represented 80.9% of total income in 2020, 114 basis points lower than 2019.

The company reported that the net transaction margin (NTM) as a percentage of UMS rose to 1.4% in 2020, up from 0.2% in 2019. This 120 basis point increase was due to a number of factors. There was a 50 basis point improvement in the cost of income which is mostly credited to lower processing costs, an approximate 30 basis point decline in net transaction losses and a 30 basis point increase in Sezzle income as a percentage of UMS.

Sezzle attributed these improvements to the company’s improving consumer profile, which saw favourable trends in repeat usage, frequency of purchases and overall payment performance.

Over the 2020 calendar year, Sezzle grew active consumers by 143.9% to 2.2 million and active merchants rose 166.6% to 26,690.

By the end of 2021 the small cap ASX share is expecting UMS to achieve an annualised run rate of more than US$2.5 billion.

EML Payments Ltd (ASX: EML)

EML describes itself as a payments technology company operating proprietary processing platforms that enables fintech disruption. It’s currently operating in almost 30 countries. Annually, it’s issuing more than 11 million gift and incentive cards, as well as 2 million general purpose reloadable cards.

EML says that it made a strong start to FY21, in the first half it saw gross debit volume (GDV) growth of 54% to $10.2 million, 61% growth of revenue to $95.3 million, 42% growth of earnings before interest, tax, depreciation and amortisation (EBITDA) to $28.1 million and 30% growth of underlying net profit after tax to $13.2 million.

The small cap ASX share generated $34.8 million of operating cashflow, which was up 329%. However, the statutory net profit was a net loss of $25.7 million due to one-off adjustments.

EML said that in the general purpose reloadable segment, revenue growth was driven by the PFS acquisition – organic growth in this segment from EML’s existing business was approximately 25%. Gaming disbursements are growing quickly, it had an annualised run rate of over $1 billion.

The gift and incentive revenue was only down 13% with volume impacted by lockdowns and social distancing in shopping centres, offset by lower spending which drove up breakage rates. There was strong conversion in the first half and that’s expected to continue into the second half as working capital is released.

Finally, the virtual account numbers division saw revenue growth of 5%.

According to Commsec, the EML share price is valued at 28x FY23’s estimated earnings.

More reading

• Here are the best performing ASX 200 tech shares in Februrary
• These were the best performing ASX 200 shares in February
• ASX 200 sinks 2.4%, Afterpay plunges, AMP jumps
• The Zip (ASX:Z1P) share price has slumped 26% in 8 days
• Here’s why the Sezzle (ASX:SZL) share price is down 10% today

Tristan Harrison 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 EML Payments. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia has recommended EML Payments and Sezzle Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Due to better technologies, growing and ageing populations, and increased chronic disease burden, demand for healthcare services is expected to grow strongly over the long term.

This could make it a great place to look for buy and hold investment options. But which ASX healthcare shares should you buy? Here are two highly rated options:

Cochlear Limited (ASX: COH)

The first ASX healthcare share to look at is Cochlear. It is a global leader in the development, manufacture, and distribution of cochlear implantable devices for the hearing impaired.

Last month Cochlear released its half year results. While the company posted a decline in earnings, the decline was far less than expected given the tough trading conditions it is facing.

For the six months ended 31 December, Cochlear recorded an underlying net profit of $125.3 million. This profit was down only 4% in constant currency from its record first half profit in the prior corresponding period. That period was of course pre-COVID-19.

Looking ahead, as hearing loss is typically a part of getting older, the company looks well-placed to benefit from the ageing populations tailwind. Especially given the industry’s high barriers to entry, its wide distribution network, and its significant investment in research and development.

Macquarie is positive on the company. Its analysts currently have an outperform rating and $245.00 price target on Cochlear’s shares.

Pro Medicus Limited (ASX: PME)

Another healthcare share to look at is Pro Medicus. It is a healthcare technology company that provides radiology information systems (RIS), picture archiving and communication systems (PACS), and advanced visualisation solutions to healthcare organisations globally.

Thanks to strong demand for its offering, Pro Medicus has been growing at a strong rate over the last few years.

Goldman Sachs has been pleased with its form in FY 2021. It recently upgraded Pro Medicus’ shares to a buy rating with a $53.80 price target.

Goldman’s analysts note that the company continues to win large contracts, even in a difficult operating environment. The broker believes this leaves it well-positioned to grow its earnings at a rapid rate over the coming years.

More reading

• Is it time to buy these 2 hot ASX healthcare shares?
• ASX 200 Weekly Wrap: Friday carnage ruins last week of ASX earnings
• 3 of the best ASX 200 results from last week
• Leading brokers name 3 ASX shares to sell today
• Is the Cochlear (ASX:COH) share price in the buy zone?

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 Pro Medicus Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. and Pro Medicus Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are some quality software as a service (SaaS) ASX shares available for Aussie investors to look at.

SaaS businesses have the potential to generate high levels recurring revenue and recurring profit because of their business models. Software businesses can also be very profitable thanks to the nature of software and its limited distribution cost, leading to high gross profit margins.

These are two businesses that could be worth looking at:

Class Ltd (ASX: CL1)

Class is a cloud accounting software provider, predominately for the self-managed superannuation fund (SMSF) industry. It works with thousands of clients that are spread across its different software suites including Class, NowInfinity, Smartcorp and Reckon Docs. The last three names are recent acquisitions made over the last couple of years.

Broker Ord Minnett rates Class as a buy and has a share price target of $2.40 for the company.

The SaaS ASX share said that it will continue to make acquisitions to drive both further scale and improved capability. It’s focused on building business relationships with its new and existing customer base through various methods including customer engagement, marketing and customer needs. With its new, larger customer base, Class will look to increase its revenue per customer with its growing product suite.

In terms of the SaaS financial numbers, Class recently reported that its ARR jumped by 24.6% year on year to $48.6 million. It’s expecting to generate $54 million of revenue in FY21, which would be 22% higher than FY20. It’s also expecting the earnings before interest, tax, depreciation and amortisation (EBITDA) margin will be 40% for the full year.

Class reported that its Class accounts increased by another 2% to 187,624, which also partly helped the business grow its EBITDA by 29% to $10.4 million.

The SaaS ASX share is now looking to new products to drive growth further, such as Class Trust where it now has 175 customers, like accountants, using it with 2,700 trusts operating on the software.

Ord Minnett reckons the Class share price is trading at around 26x FY21’s estimated earnings.

Xero Limited (ASX: XRO)

Xero is another SaaS ASX share in the cloud accounting space, except the main client base is small and medium businesses.

The company has built a large global subscriber base of clients around the world. At the last count in the FY21 half-year result, it had 2.45 million subscribers, with more than half of those based in Australia (1 million) and New Zealand (414,000).

Other regions also have large numbers of subscribers, with those numbers rising quickly. The UK had 638,000 subscribers (up 19%), North America had 251,000 subscribers (up 17%) and the rest of the world had 136,000 subscribers (up 36%) – this includes places like South Africa and Singapore.

One of the key metrics that the SaaS ASX share likes to share with investors is its annualised monthly recurring revenue (AMRR), which grew by 15% to NZ$877.6 million.

The actual revenue that Xero reported in the HY21 result was a 21% increase to NZ$410 million whilst it generated NZ$120.7 million of EBITDA and NZ$54.3 million of free cash flow. Xero’s gross profit margin improved from 85.2% to 85.7%.

At the time of the HY21 report, Xero CEO Steve Vamos said:

This result demonstrates the value our customers attribute to their Xero subscription and the underlying strength of Xero’s business model. We continue to prioritise investment in customer growth and product development in line with the long term opportunity we see.

More reading

• Why the Xero (ASX:XRO) share price is on watch today
• 5 things to watch on the ASX 200 on Wednesday
• How did WAAAX shares perform this reporting season?
• Why February was a shocker for ASX 200 tech shares
• 2 of the best ASX tech shares to buy and hold

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Class Limited and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Xero Limited (ASX: XRO) share price is one to watch in early trade after the Aussie accounting platform’s latest acquisition announcement.

Why is the Xero share price on watch?

Prior to this morning’s market open, Xero made an ASX announcement regarding its latest strategic acquisition – Planday.

Planday is a workforce management platform founded in 2004 and is focused on real-time business and employee collaboration software. The company’s cloud-based scheduling platform has over 350,000 employee users across Europe and the United Kingdom.

Xero is acquiring Planday and its technology that already integrates with the company’s accounting platform. Xero said Planday will “expand its presence into other markets where Xero operates” following the acquisition.

The Xero share price will be one to watch this morning following the update. Xero is set to pay 155.7 million euros (A$241.4 million) with total potential consideration of 183.5 million euros (A$284.6 million).

Completion of the transaction is expected to occur in the first quarter of Xero’s financial year ending 31 March 2022. Xero is anticipating a 3 percentage point increase in operating revenue growth from the purchase.

The Xero share price has been rocketing higher in recent years thanks to strong user and earnings growth.

Xero CEO Steve Vamos said the acquisition aligns with Xero’s purpose of streamlining operations for small businesses. “Planday also addresses the growing need for flexibility and rising compliance demands within the workplace”, he added.

Foolish takeaway

The pre-market acquisition announcement makes the Xero share price one to watch in early trade.

Xero shares are down 19.8% since the start of the year but remain up 54.3% on a 12-month basis. The Aussie tech company has been acquisitive in recent years including the August 2020 purchase of Waddle for A$80 million.

The S&P/ASX 200 Index (ASX: XJO) is tipped to open lower this morning based on the latest SPI futures.

More reading

• 5 things to watch on the ASX 200 on Wednesday
• How did WAAAX shares perform this reporting season?
• Why February was a shocker for ASX 200 tech shares
• 2 of the best ASX tech shares to buy and hold
• 2 compelling ASX shares to buy in March 2021

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Nuix Ltd (ASX: NXL) shares sank to an all-time low of $5.70 during intraday trade on Wednesday.

The Nuix share price actually fell off a cliff back on Friday when the analytics software provider announced its financial results before the ASX opened for trade.

The 4% decline in revenue and statutory net loss of $16.6 million didn’t impress the market, which felt the company was falling behind its own prospectus projections.

After trading at as high as $11.86 in January, Nuix shares fell an ugly 31% that day to go from $8.98 to $6.20.

And the Nuix share price has descended even further this week to trade in the $5s by Wednesday lunchtime.

So what happened to the market darling that listed on the ASX with much fanfare in early December?

Two experts back then picked Nuix as the best initial public offering (IPO) of 2020.

Now The Motley Fool has gone back to the same fund managers to see if their opinion has changed:

Nuix is a cheap technology share

Tribeca Investment Partners’ Alpha Plus portfolio manager Jun Bei Liu still has faith in Nuix.

“Our view of the stock remains positive. We believe the share price has been severely punished on small changes in revenue composition.”

She told The Motley Fool the Nuix share price is expected to head back up as the full-year results are delivered in August.

“This business is one of the cheapest tech businesses listed on the ASX. It’s trading at half of the revenue multiple as many major tech businesses, [but] with higher growth.”

Prime Value portfolio manager Richard Ivers is also still a believer.

“Long term it’s still an attractive business,” he told The Motley Fool.

“We didn’t get a great allocation in the IPO and didn’t chase the stock when it listed. So [we] haven’t owned it the last few months – still watching.”

Reasons for Nuix’s poor half-yearly result

Ivers acknowledged the first-half result was “disappointing”.

“The issue we are working to understand is the earnings profile and therefore the valuation of the business.”

Liu said that two factors had contributed to the half-year results coming in poorer than the prospectus revenue forecast.

“Firstly, the Australian currency has strengthened against the US dollar — and a big part of Nuix’s revenue is in US dollars,” she said.

“Secondly, the US election in November last year has disrupted the timing of contract awards (many of those missed contracts have now been signed in January). If you adjust for these two factors, the revenue was largely in line with forecasts.”

Only a couple of days before the half-yearly results, Morgan Stanley had put an overweight rating and a share price target of $11.00 on Nuix shares.

More reading

• The Nuix (ASX:NXL) share price has a lot of ground to make up in FY21
• Here’s why the Nuix (ASX:NXL) share price is tanking 27%
• 2 exciting mid cap ASX shares to buy and hold
• 2 outstanding ASX growth shares to buy
• 2 outstanding ASX growth shares that could be strong buys

Tony Yoo owns shares of Nuix Pty Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Nuix Pty Ltd. The Motley Fool Australia has recommended Nuix Pty Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The QBE Insurance Group Ltd (ASX: QBE) share price is one to watch this morning after the company provided a leadership update late Wednesday.

Why is the QBE share price on watch?

QBE yesterday announced the appointment of its new group chief executive officer (CEO), Andrew Horton. Mr Horton will take over from interim group CEO Richard Pryce on 1 September 2021.

Horton currently serves as CEO of Beazley plc, a UK-listed specialist insurer with global operations. He’s been serving as Beazley CEO since 2008 and his appointment to QBE remains subject to regulatory approvals.

Mr Horton said he was “honoured” to be appointed QBE’s new CEO given the group’s “impressive global footprint and talented people”. Mr Pryce will remain with the company in an advisory capacity from September before retiring from QBE in December 2021.

The QBE share price will be on watch today following yesterday’s after-market leadership announcement. Shares in the Aussie insurer edged 0.4% higher yesterday while the S&P/ASX 200 Index (ASX: XJO) climbed 0.8% to 6,818.00 points.

What else has been happening on the ASX?

QBE isn’t the only ASX 200 company to announce a change in leadership this week. Both Rio Tinto Limited (ASX: RIO) and Nine Entertainment Co Holdings Ltd (ASX: NEC) rang in changes yesterday.

Rio announced its chair, Simon Thompson, will not seek re-election as a non-executive director at the 2022 annual general meeting. The move comes after the Juukan Gorge rock shelter destruction that caused public outrage and condemnation across the country.

Nine was also in the news, unveiling current Stan Entertainment CEO, Mike Sneesby, as its new CEO, effective 1 April 2021.

Foolish takeaway

The QBE share price is one to watch in early trade as investors react to the new CEO announcement, one of several ASX leadership announcements to the market on Wednesday.

The Aussie insurer’s shares closed at $9.28 per share yesterday with a $13.7 billion market capitalisation and 3.3% dividend yield.

More reading

• 5 things to watch on the ASX 200 on Thursday
• ASX 200 rises, Rio chair will leave, Nine gets a new CEO
• Aussie GDP numbers deliver a nice 3.1% surprise
• Is investing in ASX shares better than property?
• 2 ASX 200 shares to buy for growth

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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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If you’re a fan of small cap shares, then I would suggest you take a look at the ones listed below.

Here’s why these four ASX small cap shares could be ones to watch in 2021 and beyond:

Audinate Group Limited (ASX: AD8)

The first small cap share to look at is digital audio-visual networking technologies provider, Audinate. It is best known for its industry-leading Dante audio over IP networking solution. This solution is used widely across a number of industries and is currently dominating the competition. In fact, at the last count, the number of Dante enabled products manufactured by its customers was eight times greater than its nearest rival. This appears to have positioned it perfectly for growth once the pandemic passes.

Felix Group Holdings Limited (ASX: FLX)

Another small cap ASX share to watch is Felix. It is a cloud-based enterprise software-as-a-service marketplace platform provider for the commercial construction and related industries. Felix’s platform connects contractors and their third-party vendors, automating and streamlining a range of critical procurement-related business processes in the sector. During the first half of FY 2021, Felix delivered Enterprise SaaS Contracted annualised recurring revenue (ARR) growth of 48% to $1.8 million. This compares favourably to its global total addressable market, which is estimated to be worth $7.2 billion.

PlaySide Studios Limited (ASX: PLY)

A third small cap ASX share to look at is PlaySide Studios. It is one of the largest independent video game developers in Australia. The company has a growing portfolio of developed games. This includes games based on its own original intellectual property and games developed with Hollywood studios such as Disney. During the first half of FY 2021, PlaySide reported record first half sales revenue of $5 million. This was up 63% on the prior corresponding period. Positively, this is just a tiny fraction of its global market opportunity.

Universal Store Holdings Limited (ASX: UNI)

A final small cap to watch is Universal Store. It is a fashion retailer which aims to deliver a frequently changing and carefully curated selection of on-trend products to a target 16-35 year old fashion focused customer. It has been a particularly positive performer during the pandemic and reported impressive growth during the first half of FY 2021. For the six months ended 31 December, Universal Store delivered a 23.3% increase in sales to $118 million and a 63.6% increase in underlying net profit after tax to $21.1 million.

More reading

• 2 exciting small cap ASX shares to watch
• Why Flight Centre, Life360, Nanosonics, & Universal Store are racing higher
• Why the Universal Store (ASX:UNI) share price is up 6% to a record high
• 2 buy-rated small cap ASX shares to watch
• Why the Audinate (ASX:AD8) share price is pushing higher today

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Are you looking to boost your income portfolio with dividend shares? Then you may want to look at the ones named below.

They both currently offer income investors generous dividend yields. Here’s what you need to know about them:

Accent Group Ltd (ASX: AX1)

Accent is a leading leisure footwear retailer. It could be a top option for income investors thanks to its strong position in a market experiencing positive tailwinds.

Accent recently released its half year results and delivered solid growth on both the top and bottom line. For the six months ended 31 December, Accent reported a 6.6% increase in total sales to $541.3 million and 57.3% lift in net profit after tax to $52.8 million. Impressively, the latter was its seventh consecutive record half year profit.

This strong performance was driven by explosive online sales growth, solid like for like sales growth, and the opening of new stores.

According to a note out of Morgans, its expects the company to grow its full year dividend to a fully franked 12 cents per share in FY 2021. Based on the current Accent share price, this will mean a 5.4% yield.

Telstra Corporation Ltd (ASX: TLS)

Another ASX dividend share with a generous yield is Telstra. It recently released its half year results and retained its 8 cents per share fully franked interim dividend.

Pleasingly, management also revealed that it expects to maintain its final dividend of 8 cents per share as well. This will mean a full year dividend of 16 cents per share. Based on the latest Telstra share price, this equates to a yield of 5.1%.

But perhaps the best news is that a return to growth appears to be on the horizon after years of earnings declines.

Telstra CEO Andy Penn has set an aspirational target for mid to high single-digit growth in underlying EBITDA in FY 2022 and then further growth in FY 2023. 

While this might not immediately lead to higher dividends, it should at least secure its 16 cents per share dividend for the foreseeable future. After which, there’s a chance that Telstra will increase its dividend for the first time in a very long time.

More reading

• ASX 200 Weekly Wrap: Friday carnage ruins last week of ASX earnings
• This fantastic ASX dividend share will help you beat low interest rates
• Why is the Telstra (ASX:TLS) share price falling today?
• Accent (ASX:AX1) share price on watch following earnings release
• ASX investors watch out for a rise in interest rates in 2022

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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On Wednesday the S&P/ASX 200 Index (ASX: XJO) was back on form and stormed higher after strong GDP data was released. The benchmark index rose 0.8% to 6,818 points.

Will the market be able to build on this on Thursday? Here are five things to watch:

ASX 200 futures pointing lower

The Australian share market could give back some of its gains on Thursday. According to the latest SPI futures, the ASX 200 is poised to open the day 7 points lower. In late trade on Wall Street, the Dow Jones is up 0.2%, the S&P 500 is down 0.5%, and the Nasdaq index is tumbling 1.5% lower. Rising bond yields are spooking investors once again.

Mining giants go ex-dividend

Mining giants BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) will be trading ex-dividend this morning and could act as a drag on the ASX 200 index. The Big Australian is going ex-div for its $1.30 per share fully franked interim dividend, whereas Rio Tinto is trading ex-div for its fully franked final dividend of $5.17 per share. The former will be paid to eligible shareholders on 23 March and the latter will be paid to its respective shareholders on 15 April.

Oil prices jump

Energy producers such as Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) will be on watch after oil prices jumped overnight. According to Bloomberg, the WTI crude oil price is up 3.5% to US$61.82 a barrel and the Brent crude oil price is up 3% to US$64.60 a barrel. Positive comments out of OPEC drove prices higher.

Gold price sinks

Gold miners Regis Resources Limited (ASX: RRL) and St Barbara Ltd (ASX: SBM) could come under pressure on Thursday after the gold price sank. According to CNBC, the spot gold price is down 1% to US$1,715 an ounce. Rising bond yields weighed on the precious metal.

More shares going ex-dividend

It isn’t just the mining giants trading ex-dividend this morning. A number of other ASX 200 shares are going ex-dividend and could trade lower. This includes biotherapeutics giant CSL Limited (ASX: CSL), private health insurer NIB Holdings Limited (ASX: NHF), student placement and language testing company IDP Education Ltd (ASX:IEL), and retail giant Woolworths Group Ltd (ASX: WOW).

More reading

• ASX 200 rises, Rio chair will leave, Nine gets a new CEO
• Aussie GDP numbers deliver a nice 3.1% surprise
• These ASX 200 shares are trading at near 52-week highs
• Is investing in ASX shares better than property?
• 2 ASX 200 shares to buy for growth

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 CSL Ltd. and Idp Education Pty Ltd. The Motley Fool Australia owns shares of Woolworths Limited. The Motley Fool Australia has recommended NIB Holdings Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Earlier today, I had the opportunity to sit in on Bell Asset Management’s investment webinar.

A little over a year ago, the forum may well have been a seminar. Perhaps it will be again by this time next year. But with social distancing still the norm, almost every conference on my agenda remains virtual.

Which ties in well with Bell Asset’s theme for the investment webinar. Namely, Positioning for the post-COVID consumer recovery in global equities.

The webinar featured Bell Asset’s chief investment officer Ned Bell and senior global equities analyst Nicole Mardell.

Together they examined some of the biggest risks and opportunities facing global share investors in an environment where many valuations are getting stretched, and inflation is showing signs of resurfacing.

Very strong earnings recovery still ahead

Looking at the year ahead, Ned said that markets are already effectively pricing in the post-COVID world. With a focus on the small to mid-cap space, which in this instance are shares in the US$1–5 billion range, he said:

The thing that excites us the most is the earnings trajectory and the earnings leverage we expect to see in the next 2 years… If you look back to post the dotcom bust and post the GFC, if you bought small to mid-cap stocks after that period, during those earnings troughs, the returns have been phenomenal.

We feel like we’re now in the third of these earnings troughs and recoveries. The earnings recovery in the post-COVID world, we think is going to be very, very strong. That’s going to drive exceptionally strong performance.

As far as valuations are concerned, we still find good value here. The asset class itself is trading on about 22 times earnings. But that’s against the backdrop that earnings expectations have probably still got a fair way to move up.

So from an investor’s perspective, they haven’t missed out yet.

Nicole said there were some particularly appealing opportunities in consumer discretionary shares in the year ahead:

Within the discretionary space, there’s a lot of pent-up demand that’s still to be realised across a number of subsectors. The consumer represents about 75% of the US economy, and that consumer has just been flooded with a whole bunch of cash. And they’re still in lockdown.

Bell Asset portfolio picks

Noting that people are spending a lot more time at home for both work and leisure, Nicole pointed to Yeti Holdings Inc as one of the fastest growers in the Bell Asset portfolio. Meanwhile, Home Depot Inc got a nod for the highest return of capital (ROC).

Bell Asset also recommends investors seek out some strong global brand names. Nike Inc (NYSE: NKE) counts amongst the strongest brands in its portfolio.

According to Nicole:

That’s not so much looking at Nike and saying we know the brand is strong. It’s more about understanding why that brand is strong and what they’re doing behind the scenes to continue to keep sales strong and turn it into profitable growth.

As far as underappreciated shares in the Bell Asset portfolio go, Nicole tipped Tractor Supply Company.

Seek out high-quality small to mid-cap shares

Most investors have been schooled to look for quality shares.

However, as Nicole highlighted, that’s more important now than ever.

COVID has really expanded the divide between high-quality names and low-quality names. That’s true across the sector, but specifically when you look at retail and luxury.

Ned added that Bell Asset expects small to mid-cap shares to outpace large-caps going forward:

The large-cap stocks over the last 18 months have had an incredible rally led by a handful of stocks. It’s difficult to see how that can continue. The companies are terrific, but they are so over-owned. Not only by growth managers but by value managers, probably in fear of their life.

Ned pointed to Amazon.com, Inc (NASDAQ: AMZN) as an example of the large-cap shares that have been beneficiaries of COVID. Many of these companies have actually had a lot of future earnings pulled forward into 2020.  

According to Ned, this means that going into 2021, “growth rate starts to pancake and multiples will compress. And you get inflation ticking up, which is terrible for high [price-to-earnings ratio] P/E stocks.”

He said the same story has not yet played out for the majority of the small to mid-cap consumer discretionary shares. “It’s like the Christmas present hasn’t been opened yet.” He says they remain exposed to the huge pent up consumer demand, with consumers cashed up from stimulus measures.

In short, “The earnings recovery still has a long way to play out over the next 2 years.”

And inflation?

As for the long muted inflation, Ned noted that there were signs it’s beginning to kick in with interest rates picking up. “There is a pretty strong argument for when it kicks, it’s going to kick hard,” he said.

If that happens, “the most expensive stocks get beaten up”. Company’s that have strong gross margins and pricing powers should fare best.

Nicole added that overall discretionary shares were more defensible and aided by the tailwinds of massive government stimulus that’s going right into consumer pockets.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bernd Struben 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 Amazon and Nike and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Nike. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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