May was a pretty awful month for ASX shares, as we watched the S&P/ASX 200 Index (ASX: XJO) plunge 3%.
In such distressing times, it's interesting to see which stocks the professional investors stick with despite watching their valuations shrink.
QVG Capital explained its thesis for two such examples in a recent memo to clients.
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'Double-digit earnings growth for many years to come'
The analysts at QVG Capital were upfront about its performance last month.
"May performance was poor," read the memo.
"The fund tracked the market lower with underperformance (minus 4%) largely attributed to our meaningful holding in insurance builder Johns Lyng Group Ltd (ASX: JLG), which finished the month down 33%."
The team blamed a reaffirmation of its earnings outlook that fell short of investor expectations, and two directors selling their shares.
But Johns Lyng remains the fund's second-largest holding.
"We remain confident in the durability and longevity of the Johns Lyng story with several 'irons in the fire', both organic and inorganic, to drive double-digit earnings growth for many years to come."
QVG Capital noted that the insurance builder and repairer is well placed financially.
"JLG is capital-light, has a long runway for growth and has no debt," read the memo.
"High levels of insider ownership, a unique culture and solid track record of execution give us confidence May's performance will only be a hiccup."
It seems other professionals agree, with six out of seven analysts surveyed on CMC Markets rating Johns Lyng shares as a strong buy.
Even after a shocking May, Johns Lyng shares have risen a handsome 45.3% over the past 12 months.
'Long runway for growth'
Dental centre operator Pacific Smiles Group Ltd (ASX: PSQ) was another big detractor in May for QVG Capital, also dropping a painful 33%.
"Omicron and a bad flu season have seen patients stay away from healthcare settings (pathology, IVF and radiology volumes are also down) this half," read the memo.
"Unlike the very strong return to trading Pacific Smiles saw [after Delta] in October and November last year, patient volumes have been slow to recover this calendar year."
However, the stock is still a long-term holding for QVG Capital.
"We continue to like Pacific Smiles due to its high returns on incremental capital and long runway for growth."
The horrible run in May merely extended already heavy losses in 2022. The Pacific Smiles share price has almost halved since the start of the year.
According to the QVG team, the heavily discounted share price makes it a "compelling" buy right now.
"For example, if Pacific Smiles were to never open another centre and just let their existing 125 practices mature (centres ramp up over several years) it would trade on more than a 10% free cash flow yield."
Other analysts are slightly less certain, with only two out of four surveyed on CMC Markets rating Pacific Smiles as a strong buy. One other fund manager voted it a moderate buy.
