One of the country's respected fund managers has outlined a key metric to look for when it comes to finding some ASX share opportunities.
The ASX share market saw a correction during January 2022. There is plenty of speculation about what interest rates are going to do this year as central banks try to keep inflation under control.
But Auscap Asset Management Tim Carleton believes that there's a metric that investors can focus on to find opportunities, according to the Australian Financial Review. He also outlined some ASX shares that could be opportunities.
Mr Carleton actually thinks some of the companies being sold-off are opportunities:
The one thing that I think is getting confused is this correction, particularly in highly priced stocks in the market, has nothing to do with the outlook for the domestic economy. For us, it's very positive.
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The special investment metric
It was pointed out that just because the economy is seeing inflation, that doesn't mean that all businesses and ASX shares will be affected in the same way. Certain ones could benefit from higher inflation.
Which ones are high-quality? The answer, for Mr Carleton, is to look at the return on investment (ROI):
It's not rocket science. It's finding companies that have proven themselves to be high-quality companies. And broadly, you've got a bit of a cheat function to determine whether something's a high-quality company, and that's go and have a look at its statutory ROI.
Everyone talks about moats and competitive advantages. Well, if they have a demonstrably higher ROI than their peers, there's obviously something there.
A good business isn't a popular business, it's not a business that's getting a lot more users. A business to its owner is only valuable to the extent that it produces cash flow that the owner can take out of the business.
Which ASX shares are high-quality?
The investment manager gave a few different examples, as reported by the AFR.
First was BHP Group Ltd (ASX: BHP). This is one of the world's biggest resources businesses which has operations focused on commodities like iron ore, copper and nickel. It's divesting oil and expanding into potash. The fund manager said that BHP has got better deposits than peers.
Another mentioned business was REA Group Limited (ASX: REA). It's the owner of digital Australian real estate portals realestate.com.au and realcommercial.com.au, as well as other real estate-related businesses. REA Group also has a number of international property portal investments in Asia and the US. Mr Carleton notes that REA Group has a very strong position in the online property portal space.
Another two ASX shares that were mentioned as potential opportunities were JB Hi-Fi Limited (ASX: JBH) and Nick Scali Limited (ASX: NCK).
JB Hi-Fi generated a "very, very strong result" as well as ongoing positive year-on-year growth for January 2022. Commenting on expectations that consumer demand for electronics would drop at JB Hi-Fi, the fund manager said:
And so as a result, that stock is trading at a very deep discount to the rest of the market, despite the fact that it's an extremely high-quality retailer, very, very well run, generates a truckload of cash and has a very strong capital position.
Nick Scali was also named as an ASX share facing a similar narrative despite the strong housing cycle and high earnings before interest and tax (EBIT) margin. But it's on a "low double-digit earnings multiple". But the ASX share has one of the best management teams and is conservatively run, according to the fund manager.
