Tag: Motley Fool

Warren Buffett’s success has not been built on an ability to predict when the next market crash will take place. In fact, the Oracle of Omaha has rarely sought to second-guess market movements.

Instead, he seeks to position his portfolio so that it can take advantage of future short-term movements, as well as a likely rise in share prices that has led to high single-digit annual returns for indexes such as the S&P 500 Index (INDEXSP: .INX) and FTSE 100 Index (INDEXFTSE: UKX) over recent decades.

As such, following his lead could be a sound move. By preparing for a range of possible outcomes in 2021, including a market crash, it may be possible to obtain higher long-term returns.

The unpredictability of the stock market

The stock market’s future movements can be extremely unpredictable. The 2020 stock market crash is evidence of this, with indexes such as the S&P 500 and FTSE 100 declining by around a third in a matter of weeks. This was not an isolated event, with previous bear markets such as the 2009 global financial crisis catching many investors by surprise, both in terms of the speed of decline and the scale of stock price falls.

Due to its unpredictability, as well as a history of following a cycle, it could be a sound move to seek to avoid trying to estimate how the stock market will perform in future. Warren Buffett seems to have settled on this approach, with the world’s most successful investor focusing on company facts and figures, instead of forecasts.

In doing so, Buffett is able to position his portfolio for a variety of future outcomes. For example, he holds large amounts of cash in case there are buying opportunities prompted by a stock market crash. Meanwhile, he holds high-quality companies that may be better placed to survive a market downturn, as well as benefit from a likely growth opportunity in the long run.

Portfolio positioning in 2021

At the present time, such an approach is arguably of even greater value than ever. The economic outlook is extremely difficult to predict due to uncertainty caused by the coronavirus pandemic. Should this lead to further disruption for a variety of industries, as well as rising unemployment and weak consumer confidence, a market crash could realistically take place in 2021.

However, should a vaccine rollout and the end of lockdown measures lead to a release of pent-up demand across many sectors, the opposite could be true. The stock market rally since the 2020 decline could realistically continue and provide capital growth opportunities for investors.

Therefore, following Warren Buffett’s strategy could be a worthwhile move in 2021. It enables an investor to be prepared for a market crash through having cash in their portfolio. Similarly, by purchasing today’s undervalued shares, it is possible to follow in Buffett’s footsteps and benefit from a likely rise in the stock market over the long run.

More reading

• Top brokers name 3 ASX shares to sell next week
• Is the Westpac (ASX:WBC) share price a buy?
• 2 rapidly growing small cap ASX shares to buy
• 2 fantastic ASX dividend shares to buy
• 2 top ETFs to buy and hold

Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 investing in small cap shares, then you may want to look at the ones listed below.

These companies could have very bright futures ahead of them. Here’s what you need to know about them:

Booktopia Group Ltd (ASX: BKG)

The first ASX small cap share to look at is Booktopia. It is an online book retailer which has been growing very strongly.

For example, late last month it released its half year update and revealed a record month in December and a record half.

Booktopia shipped a total of 4.2 million units for the six months, up 40% on the prior corresponding period. Impressively, 728,000 of these units were shipped during the final month of the half. This was driven by the shift to online shopping and its investment in additional automation and increased capacity at its distribution centre.

This ultimately underpinned a 52% increase in unaudited half year revenue to $113 million and a 506% increase in adjusted operating earnings to $8 million.

Analysts at Morgans are positive on the company. They recently put an add rating and $3.48 price target on its shares. The broker believes the company is well-placed to grow its market share and benefit from operating leverage.

MyDeal.com.au Limited (ASX: MYD)

MyDeal.com.au is another ecommerce company which could be a good option for small cap investors.

Thanks to the shift to online shopping, which has accelerated over the last 12 months, MyDeal has been growing rapidly. For example, the company recently released its first half update which revealed that gross sales increased 217% over the same period last year to $126.7 million. This was driven by a strong jump in active customers to a record 813,764 and increased repeat use.

Looking ahead, management intends to use the proceeds from its $40 million IPO to drive future growth. This includes growing its private label business and investing in advertising to grow its customer base and brand.

Morgans is also a fan of MyDeal and currently has an add rating and $1.70 price target on its shares.

More reading

• 3 very exciting small cap ASX shares to watch
• 2 exciting small cap ASX shares
• 3 fast-growing small cap ASX shares to watch
• Here are 3 ASX IPOs this fund manager was buying
• 3 growing small cap ASX shares to watch

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 wanting to overcome the low interest rates being offered by the banks, then the share market could be the answer.

Two ASX dividend shares that offer investors interest rate-beating yields are listed below. Here’s what you need to know:

Super Retail Group Ltd (ASX: SUL)

The first ASX dividend share to look at is Super Retail. It is the company behind popular retail store brands BCF, Macpac, Rebel, and Super Cheap Auto.

Last week the company released its half year results and revealed stellar sales and profit growth. For the six months ended 31 December, Super Retail reported a 23% increase in sales to $1.78 billion and a whopping 139% increase in underlying net profit after tax to $177.1 million. 

This strong result was driven by solid growth across the company and particularly its online businesses. Online sales jumped 87% over the prior corresponding period to $237.4 million. In light of its strong performance, the Super Retail board declared a fully franked dividend of 33 cents per share. 

One broker that is positive on the company is Goldman Sachs. After reviewing its result, the broker reiterated its buy rating and lifted its price target to $15.00. The broker is also forecasting a dividend of ~81 cents per share in FY 2021 (including a special dividend), which equates to a 6.8% yield. Though, it notes that even if capital management doesn’t happen, it should provide a yield of approximately 5%.

Telstra Corporation Ltd (ASX: TLS)

Another ASX dividend share to consider is Telstra. This telco giant has also recently released its half year results, which went down well with brokers.

Particularly given management’s positive outlook. After years of earnings declines, Telstra CEO Andy Penn appears confident that the company is positioned to return to growth in FY 2022. This is thanks to the T22 strategy which has simplified its business and helped cut costs. Mr 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. 

Another positive is that Telstra maintained its interim dividend at 8 cents per share and revealed plans to do the same with its final dividend. Based on this and the current Telstra share price, this will mean a fully franked 4.8% dividend yield.

Goldman Sachs was pleased with this update as well. The broker put a buy rating and $4.00 price target on its shares.

More reading

• ASX retail shares in focus as Aussies spend big in January
• Vita Group (ASX:VTG) share price up on results, despite Telstra woes
• Why the Whispir (ASX:WSP) share price is surging 10% higher today
• 2 high yield ASX dividend shares to buy today
• Telstra (ASX:TLS) full year dividend for 2021 expected to be 16 cents per share, fully franked

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Super Retail Group Limited and Telstra 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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Last week was a disappointing one for the S&P/ASX 200 Index (ASX: XJO). After a strong start, the benchmark lost all its gains and more on the final day of the week. This led to the benchmark index falling 0.2% over the five days to 6,793.8 points.

Another busy one is expected next week. Here are five things to watch:

ASX futures pointing lower

The Australian share market looks set to start in the red following a subdued end to the week on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the week 11 points lower. On Wall Street on Friday night, the Dow Jones was flat, the S&P 500 fell 0.2%, and the Nasdaq index was up slightly.

Afterpay half year results

All eyes will be on the Afterpay Ltd (ASX: APT) share price on Thursday when the payments company releases its half year results. According to a note out of Morgan Stanley last month, the broker is expecting the company to report active customers of approximately 13.6 million for the first half of FY 2021. This represents a 37.4% increase from 9.9 million active customers at the end of FY 2020. Updates on its international expansion in Europe and Asia will also be of interest to investors.

A2 Milk update

The A2 Milk Company Ltd (ASX: A2M) share price could also be on the move on Thursday when it hands in its half year report card. Due largely to COVID-19 headwinds in the daigou channel, late last year the infant formula company downgraded its guidance for the first half and full year. In respect to the former, it revealed that it expects to report revenue of ~NZ$670 million and an EBITDA margin of ~27%. Whereas for the full year, it has guided to revenue of NZ$1.4 billion to NZ$1.55 billion and an EBITDA margin of 26% to 29%. Investors will no doubt be hoping this isn’t downgraded further.

Woolworths half year results

On Wednesday Woolworths Group Ltd (ASX: WOW) will be releasing its highly anticipated half year results. According to a note out of Goldman Sachs, its analysts are forecasting total revenue of $35,789.7 million for the first half. This will be a 10.1% increase on the prior corresponding period. In respect to earnings, it is expecting a 5.3% increase in first half net profit to $1,030.2 million.

SEEK result

The SEEK Limited (ASX: SEK) share price will be on watch on Tuesday when it releases its half year update. Earlier this month analysts at Goldman Sachs tipped the job listings company to upgrade its FY 2021 guidance. The market is currently expecting SEEK to deliver operating earnings of $404 million in FY 2021, but it feels this could be lifted to $420 million. This is due to the continual improvement in macro trends relative to the October levels when its guidance was given.

More reading

• 2 ASX 200 shares to buy for growth
• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• ASX 200 sinks 1.3%, Cochlear soars, TWE sours
• ASX retail shares in focus as Aussies spend big in January

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool Australia owns shares of AFTERPAY T FPO and Woolworths Limited. The Motley Fool Australia has recommended SEEK 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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There are a few high-quality exchange-traded funds (ETFs) that could be worth holding for the long-term.

ETFs allow you to invest in many businesses at once with a single investment. They can be useful for providing diversification.

These two ETFs could be worth thinking about:

Vanguard Msci Index International Shares ETF (ASX: VGS)

This ETF is about giving investors exposure to the global share market, namely businesses which are listed in economically developed countries.

The biggest exposure it gives is to the largest companies. Vanguard aims to give broad diversification to a broad range of securities to participate in the long-term growth potential of international economies outside Australia.

To jump straight to the top 10 holdings of this ETF, those positions are: Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, Johnson & Johnson, JPMorgan Chase, Visa and Nestle.

Just over two thirds of the ETF is invested in the US. The other countries that represent more than a 1% position include Japan, the UK, France, Canada, Switzerland, Germany, Netherlands, Hong Kong and Sweden.

There’s more to the Vanguard MSCI Index International Shares ETF than just the top 10. It actually has over 1,500 positions. Looking at the sector allocation at the end of January 2021, IT had a 22.6% weighting, healthcare had a 13.3% weighting, consumer discretionary had a 12.3% weighting, financials had a 12.2% weighting and industrials had a 10.4%. All of the other sectors had weightings of less than 10%.

The ETF has an annual management fee of 0.18% per annum, it has produced net returns of 11.7% per annum over the last five years.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

This ETF is about investing high quality businesses in the US.

In the portfolio are businesses that Morningstar have rated as having wide economic moats, or sustainable competitive advantages. The ETF only owns companies that Morningstar thinks are trading at good value compared to the equity research outfit’s estimate of fair value.

It has an annual management fee of 0.49%, which is cheaper than what plenty of active fund managers charge.

At the end of January 2021, its largest holdings were: John Wiley & Sons, Charles Schwab, Corteva, Cheniere Energy, Wells Fargo, Blackbaud, Intel, Bank of America, Biogen and Constellation Brands.

VanEck Vectors Morningstar Wide Moat ETF has produced returns strong than the S&P 500 over the last five years, producing average net returns per annum of 17.5%. The index that the ETF tracks has outperformed the S&P 500 over the last 10 years.

More reading

• 2 high quality ETFs for ASX investors to buy in February
• Got money to invest? Here are 3 ASX shares to buy
• 2 ETFs to buy for strong diversification
• 2 excellent ASX ETFs to buy
• Countdown to launch of new ASX indexes for ESG boom

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF and Vanguard MSCI Index International Shares ETF. 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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Last week was another very busy one for investors with a seemingly endless stream of results releases.

I have been through them all and have picked out two results which I think were among the best released over the period. They are as follows:

Australia and New Zealand Banking GrpLtd (ASX: ANZ)

This banking giant released its first quarter update last week to much acclaim. For the three months ended 31 December, ANZ reported unaudited cash earnings from continuing operations of $1,810 million. This was an impressive 54% jump on the average of the final two quarters of FY 2020. Management advised that this was driven partly by improvements in its net interest margin and flat operating costs.

Another positive was the bank revealing a COVID-19 collective provision release of $173 million. This represents ~10% of the $1,700 million set aside during FY 2020. Management stated that it feels this release is prudent when balancing the improvement in the economic outlook at the end of the December quarter with the level of ongoing uncertainty.

CSL Limited (ASX: CSL)

Another which caught the attention of investors was the half year results of this biotherapeutics giant. It smashed expectations by posting a 16.9% increase in revenue to US$5,739 million and a massive 45% jump in net profit after tax to US$1,810 million. Management advised that this was driven by growth in its core immunoglobulin portfolio, the successful transition to its own distribution model in China, strong growth HAEGARDA sales, and exceptionally strong demand for influenza vaccines. Sales of the latter increased 44% over the prior corresponding period.

The only real disappointment was that management has only retained its full year guidance for FY 2021 despite this stellar profit growth. It continues to forecast a full year net profit after tax of US$2,170 million to US$2,265 million in constant currency. This represents year on year growth of 3% to 8%, which implies a sharp decline in second half profit.

More reading

• Why the Ainsworth (ASX:AGI) share price surged 15% today
• Brokers name 3 ASX shares to buy right now
• Why CSL, LiveTiles, OceanaGold, & Woodside shares are tumbling lower
• CSL (ASX:CSL) share price hit by broker downgrade
• 5 things to watch on the ASX 200 on Friday

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. 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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“I like people admitting they were complete stupid horses’ asses. I know I’ll perform better if I rub my nose in my mistakes. This is a wonderful trick to learn.”

— Charlie Munger

How’s that for a place to start.

Yep, this is my ‘rub my nose in it’ moment.

You’re welcome.

My biggest mistake was made in 2013. And it’s a doozy.

You see, I didn’t lose just 50%.

Or 70%.

It was worse than that.

No, it wasn’t 80%.

And not 90%.

Yep, still worse.

No, not even 100%.

Worse.

Huh?

Yep, worse.

Let me explain.

See, if I’d bought $1,000 shares in a company and that company had gone broke, I’d have lost my $1,000.

Which would, to be fair, really suck.

But you know what’s worse?

Costing myself even more than that $1,000.

No, I wasn’t playing options or some other strange derivative ‘trading strategy’.

The money I ‘lost’ was in the form of foregone profits.

Here’s how it played out.

In 2012, I recommended that members of Share Advisor, one of the Motley Fool services I run, buy shares in Domino’s.

The share price at the time was around $8.50 or so. (I’d check to be exact, but it hurts too much!)

In 2013, sitting on a nice 40% profit and in the face of slowing growth and potential market saturation, I happily recommended our members sell.

Beauty!

You can’t go broke taking a profit, after all…

Except.

Except the shares are now (and it hurts to even type this) $105.98.

Yep.

That would’ve been a 12-bagger.

Instead of turning our hypothetical $1,000 into $1,400 (which was nice), it could have been worth more than $12,000 instead.

Or $10,000 into $120,000.

You get the point.

I could’ve had 11 absolute flame-outs and still broken even, had I held Domino’s until today.

Yes, most of my industry and the media (and more than a few members) focus on trying to avoid losing 20, 30 or 40%. 

And that’s not wrong. If you can avoid losing money, you should.

But I dare say most (if not all) investors would do themselves a favour by recalibrating their gaze to the ones that got away (the ones they either sold too early or never held at all).

I’m not even talking about cherry-picking the very best performing stock on the ASX and giving yourself grief for not buying it.

You can’t buy every winner — and if you owned everything, you’d just end up with the market’s average result anyway.

But my Domino’s experience has taught me a few lessons.

First, “be slow to buy, and even slower to sell”. Yep, write that down, and re-read it often. When you own a quality business, I reckon you should part company with it only reluctantly, and give it plenty of rope before you do.

Second, by all means assess the risk of losing money, but also consider the risk of not making money. That is, consider the full range of outcomes. Turns out I was wrong to sell Domino’s. But even if I was right and Domino’s business was maturing, maybe the shares might have fallen 25% or 40%. Painful, sure, but the potential for a 1,200% gain makes up for a lot of smaller losses.

Third, don’t be blinded by your own mistakes. I’m happy to say I (belatedly) again recommended our members buy Domino’s, in 2018, at around $42. It would have been silly (and stubborn and arrogant) to stick my head in the sand and refuse to acknowledge my mistake. No, it doesn’t make up for the missed opportunity altogether, but at least we’ve gone some way to minimising the cost of the mistake.

Here’s the hard part: Now it’s over to you.

I can’t make you change your approach. Some of you, despite my best efforts, will still prioritise avoiding losses over maximising gains. That’s fair enough. You need to invest the way you think is best for your circumstances, personality and risk tolerance.

But I hope that this will strike a chord with at least some of you.

I hope you’ll realise that investing is a portfolio game, where the aim is to maximise the long term value of the total portfolio, not minimise the number of individual losing investments you make. 

I hope you’ll realise that, well chosen, a portfolio of companies with big potential gains, appropriately handicapped for the odds of success, has a good chance of beating a portfolio of companies chosen to minimise the chance of individual loss. Perhaps even by a decent margin.

I’m happy to say that, thus far — almost 10 years in — Motley Fool Share Advisor is still soundly beating the market,

The average return, per recommendation, is currently 61.2%, compared to an investment in the All Ords on the same date, which would have returned an average 38.9% — both including dividends.

That’s not bad over more than 9 years and more than 100 individual buy recommendations.

Yes, despite that mistake.

Actually, it’s in part because of that mistake: it was a lesson learned, and hopefully applied diligently thereafter.

Still, our scorecard (and, most importantly, our members) would have been better off if I’d never made it at all.

Which is why I’m hoping there’s value in rubbing my nose in this particular mistake: I hope to never make it again, and I hope you can learn from it, too.

More reading

• Top brokers name 3 ASX shares to sell today
• Why CSL, Domino’s, IPH, & Treasury Wine shares are storming higher
• Leading broker tips Domino’s (ASX:DMP) share price to go even higher
• ASX 200 down 0.5%: Domino’s delivers, Westpac impresses, Coles sinks
• Why Domino’s, EML Payments, Redbubble, & Westpac shares are storming higher

Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Dominos Pizza Enterprises 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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If you’re wanting to diversify your portfolio with some international options, then you might want to look at exchange traded funds (ETFs).

ETFs give investors easy access to a large and diverse number of different shares through a single investment. This makes them a great idea if you’re wanting diversification but don’t have the funds to spread across a large number of individual shares.

With that in mind, listed below are two ETFs which are highly rated. Here’s what you need to know about them:

BetaShares Global Cybersecurity ETF (ASX: HACK)

The first ASX ETF to look at is the BetaShares Global Cybersecurity ETF. It aims to track the performance of an index providing investors with exposure to the leading companies in the growing global cybersecurity sector.

BetaShares notes that in a world where smart, connected devices already far outnumber humans, investors are increasingly recognising the growth opportunities presented by the global cybersecurity sector.

As the HACK ETF provides access to a portfolio of leading companies from around the world which are working to reduce the impact of cybercrime, this ETF could be a great way to gain exposure to this growth sector.

Included in the fund are both global cybersecurity giants and emerging players from a range of global locations. Among its holdings you’ll find Accenture, Cisco, Cloudflare, Crowdstrike, and Okta.

The latter provides large enterprises with workforce identity solutions. Demand for its offering has been growing rapidly over the 12 months as more people work from home.

Over the last three years, the ETF has generated a return of 25.1% per annum for investors.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

The VanEck Vectors Morningstar Wide Moat ETF gives investors exposure to a diversified portfolio of attractively priced US companies with sustainable competitive advantages.

Among the 49 stocks included in the portfolio, you’ll find the likes of Amazon, Bank of America, Berkshire Hathaway, Constellation Brands, Intel, McDonalds, and Microsoft.

Berkshire Hathaway is of course Warren Buffett’s multinational conglomerate. Over the years the conglomerate has acquired well-known companies such as Duracell, GEICO, and See’s Candies, among countless others. It also has large stakes in the likes of American Express, Apple, Coca-Cola, Kraft Heinz, and Wells Fargo.

These successful acquisitions and investments have led to its shares generating staggering returns for investors over the last five decades. Few investors would bet against Buffett’s investments doing the same in the future.

Over the last five years, the ETF has provided investors with a total return of 17.1% per annum.

More reading

• Got money to invest? Here are 3 ASX shares to buy
• 2 ETFs offering unique investment exposure
• 2 excellent ASX ETFs to buy
• Got cash to invest? Here are 3 ASX shares to buy
• 2 top ETFs to buy next week

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of BETA CYBER ETF UNITS. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF. 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 a few S&P/ASX 200 Index (ASX: XJO) shares that are delivering elevated levels of growth at the moment.

COVID-19 has caused flow-on effects to different industries and companies. For some, like travel, it has made it difficult to make any profit at all. For others, there is a lot of growth happening:

Bapcor Ltd (ASX: BAP)

Bapcor describes itself as Asia Pacific’s leading provider of vehicle parts, accessories, equipment, services and solutions, with a network of over 1,100 locations across Australia and New Zealand.

The company had been guiding that the FY21 half-year result would be strong. It was.

Revenue for the six months to 31 December 2020 was up 25.8% to $883.6 million. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 36.5% to $145.6 million, underlying EBIT went up 45% to $106.8 million and underlying net profit after tax (NPAT) rose by 54% to $70.2.

Statutory earnings per share (EPS) rose 25.3% to 19.9 cents, allowing the board to increase the interim dividend by 12.5% to 9 cents.

Bapcor said that its trade segment, including Burson, delivered revenue growth of 12.3% and it added another 9 stores during the period.

The retail segment, which includes Autobarn, saw revenue growth of 44% and EBITDA growth of 55.8%.

The ASX 200 share also said that significant progress has been made in its investments for long-term growth. The new distribution warehouse in Melbourne is nearing completion and a new e-commerce platform will soon be launched.

It said that performance in the first month of the second half of FY21 has been at similar levels as the first six months of the year.

Sonic Healthcare Ltd (ASX: SHL)

Sonic is one of the world’s largest pathology businesses with operations in Australia, North America and Europe.

The healthcare ASX 200 share announced its FY21 half-year result a couple of days ago which showed revenue growth of 33% to $4.4 billion.

There has been a significant revenue and earnings contribution from COVID-19 testing, leveraging existing Sonic infrastructure. More than 18 million COVID-19 PCR tests have been performed to date in approximately 60 Sonic laboratories around the world.

The global base business revenue (excluding COVID-19 testing) was down 1% in the first half, but it was significantly less impacted than in the first few month of the pandemic.

Sonic said it managed to grow its profit margins in both its laboratory and imaging operations.

Half-year EBITDA grew by 89% to $1.3 billion and net profit rose by 166% to $678 million. It was this strength that allowed the board to continue the progressive dividend policy, increasing the dividend by 6% to 36 cents.

For the rest of FY21, it’s expecting continuing high levels of COVID-19 testing. It’s looking at growth opportunities globally – Sonic is currently bidding on “significant” opportunities in Australia, the UK, the USA and Canada.

More reading

• These were the best performing ASX 200 shares last week
• These were the worst performing ASX 200 shares last week
• ASX 200 sinks 1.3%, Cochlear soars, TWE sours
• The PWR (ASX:PWH) share price is on fire today, up 6%. Here’s why
• ASX 200 down 0.6%: Cochlear jumps, Goodman upgrades guidance

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia has recommended Sonic Healthcare 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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The team at specialist small and microcap fund manager, Spheria Asset Management, have been busy looking at small cap ASX shares they believe offer investors exceptional cash flow.

Why is cash flow important?

Spheria Asset Management’s Portfolio Manager, Marcus Burns, explained the importance of cash flow when looking at small caps.

He commented: “When it comes to investing in small caps, too many investors ignore cash flow, but when it comes to small caps, cash is king.”

“Key to our investment process is buying businesses that generate predictable free cash flows at an appropriate multiple for the forecast growth profile. By default, this lends itself to screening out companies that don’t generate cash, lack sustainability or are being priced nonsensically by the market.”

“The cash-flow conversion rate is a key metric in this process, and we believe it’s one of the most important characteristics for enduring small-cap returns.”

Given that the Spheria Australian Smaller Companies Fund has returned 33.9% (net of fees) in the six months to January 31, it certainly pays to listen to what Spheria says.

Why ASX shares does Spheria like?

The three small cap cash flow kings that Spheria likes are listed below. Here’s what it has to say about them:

A2B Australia Ltd (ASX: A2B)

The first cash flow king is A2B Australia, formerly known as Cabcharge. Mr Burns explained:

“The COVID-19 outbreak has hurt sentiment towards the business given reduced taxi usage from ongoing restrictions. While the company’s short-term performance in its core mobility business is likely to remain patchy the balance sheet is more than strong enough to see A2B through ($24m net cash).

“The company has also begun to articulate a measured strategy to grow its payments business into the non-taxi space in Australia and its mobility platform solutions business globally. We believe the market continues to discount an overly bearish outcome on the core mobility business let alone any success on the latter two growth opportunities.

“A2B’s fundamentals are incredibly strong – its long-term rate of cash flow conversions sits at 84%, it has net cash of around $24m, yet trades on an EV/EBIT multiple of around 4x.”

Monadelphous Group Limited (ASX: MND)

Another cash flow king according to Spheria is this global engineering company. The portfolio manager commented:

“What’s important about this construction engineering company is that it has two divisions, one is an engineering division where it builds something once-off, the second is a maintenance division.

“We believe the maintenance division is the company’s most lucrative division and it has been growing to now account for around 63% of the business.

“Monadelphous has a long-term cash flow conversion rate of 112%. It trades on around 11x EBIT, has around $200m of cash on the balance sheet and we think it presents incredibly good value especially now that the business mix has improved over time. Monadelphous stands to benefit from the improved sentiment and exploration activity in the resources sector.”

Mortgage Choice Limited (ASX: MOC)

Finally, Mr Burns feels that mortgage and home loan broker, Mortgage Choice, is another cash flow king for ASX investors to look at. He explained:

“During December, MOC was one of our microcap fund’s largest contributors, clocking a 20% return. We were genuinely perplexed why the stock remained so cheap after posting a robust FY20 result. Since the day of that announcement, it has returned an additional 71% showing how microcaps share price performance can sometimes badly lag the fundamentals.

“The company still only trades on a PE of 10x with net cash of $6m and a highly attractive dividend yield of +8% (fully franked) that is underpinned by a $54bn loan book.”

More reading

• Mortgage Choice (ASX:MOC) share price tumbles 14% despite profit boost
• NRW (ASX:NWH) share price jumps on acquisition update

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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