While financial forecasts this reporting season might be scary, here is a pair of stocks that might resist the coming economic slowdown.
Published August 10, 8:00 am AEST
Rising interest rates are expected to bite both Australian consumers and businesses, causing an economic slowdown.
With this in mind, many experts are urging investors to buy “quality” companies.
Elvest portfolio managers Adrian Ezquerro and Jonathan Wilson told clients in a memo that they are nervous about financial projections revealed this month.
“The August reporting season will go some way to enlightening investors, and we suspect aggregate forecast earnings will be pared back further in the coming months,” read the memo.
“Nonetheless, we continue to selectively build positions in high quality companies at material discounts to assessed valuations.”
The Elvest team gave two examples of ASX shares it has been buying up recently:
‘Resilient in times of economic stress’
Lotteries reseller Jumbo Interactive Ltd (ASX: JIN) meets the “high quality” test because it operates in an evergreen industry.
“History suggests lotteries to be resilient in times of economic stress,” read the Elvest memo.
“While in more recent years, a significant increase in the penetration of internet ticket sales have created near perfect tailwinds for the digital sale of lottery tickets.”
Jumbo Interactive has enjoyed consistently growing ticket sales — industry sales have increased from $2.4 billion in 1990 to $7.2 billion in 2021.
The Elvest portfolio managers said conditions continue to be “fertile” for the company.
“Now embedded as a duopoly in the digital channel alongside Lottery Corporation Ltd (ASX: TLC), Jumbo Interactive also offers a substantial global growth opportunity from its software and managed services divisions.”
The Jumbo share price has dipped 24% year-to-date but has returned 431% over the past five years. It currently pays out a dividend yield of 2.75%.
Other analysts almost unanimously agree with the Elvest team, with five out of six surveyed on CMC Markets rating Jumbo Interactive as a strong buy.
The company will report its latest financials on 25 August.
True value of this business is hidden
The image of News Corporation (ASX: NWS) as a newspaper and media company “masks its true value” from casual investors, reckon the Elvest portfolio managers.
“Today, the business encompasses digital real estate services, subscription video services, news and information services and book publishing.”
While newspapers are a struggling industry, the reality is much of News Corp’s market cap is taken up by its holdings of non-news subsidiaries.
This means that the news business practically comes for free when you buy shares in News Corp.
“Much of News’ $14 billion market value is underwritten by its 61.4% stake in REA Group Limited (ASX: REA) and its 80% ownership of Move Inc,” read the Elvest memo.
“This values the balance of the business below 2 times forecast EBITDA, which totals more than US$1 billion.”
The company also has “a strong balance sheet“, enabling it to fund an array of growth options”.
“Yet [it] trades on an attractive free cash flow yield of over 8%.”
Elvest’s faith in News Corp has already paid off.
The company, which is dual listed, reported its financials on Tuesday morning from the US. News Corp showed off its highest earnings ever, with net income almost doubling.
News Corp shares jumped 5.89% for the day to close Tuesday at $25.70.
TMF article link: https://www.fool.com.au/2022/08/10/2-high-quality-asx-shares-now-going-for-a-discount-elvest/
This article was authored by Tony Yoo and originally released by The Motley Fool.
Adrian Ezquerro and Jonathan Wilson are Principals of Elvest Co Pty Limited (ABN 65 657 018 614), Corporate Authorised Representative number 001296195 of Fundhost Limited, and a Portfolio Manager of The Elvest Fund.
Adrian Ezquerro and Jonathan Wilson are Principals of Elvest Co Pty Limited (ABN 65 657 018 614), Corporate Authorised Representative number 001296198 of Fundhost Limited, and a Portfolio Manager of The Elvest Fund. The Fund is a long only, small cap Australian equities fund and is open to wholesale investors only. The information provided is general in nature only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.