One of my favourite sources is market data provided by New York University valuation guru Aswath Damodaran which covers a range of industry measures and multiples.
Given I've made it my mission recently to seek out companies which can sustainably churn out exceptionally high returns it makes sense to narrow down the prospective search area.
Helpfully, one of Damodaran's data sets shows average return on equity (ROE) by industry. The data is for U.S. companies over the 12 months to January 2016, but can provide direction on where to look for prospective locally-listed companies.
The average return on equity for the almost 7,500 companies was 10% when adjusted for R&D spending. But we're not looking for average. We're looking for exceptional. As in, CSL Limited's (ASX: CSL) 50%-return-on-equity!
The table below shows seven of the highest returning industries, as well as my top picks of the ASX companies in that industry.
|
Industry |
Industry ROE (adjusted for R&D) | Top ASX pick |
ASX company ROE |
| Retail (Automotive) |
34% |
AMA Group Ltd (ASX: AMA) |
19% |
| Restaurant/Dining |
32% |
Domino's Pizza Enterprises Ltd. (ASX: DMP) |
23% |
| Advertising |
26% |
REA Group Limited (ASX: REA) |
42% |
| Information Services |
22% |
GBST Holdings Limited (ASX: GBT) |
27% |
| Hotel/Gaming |
20% |
Reef Casino Trust (ASX: RCT) |
56% |
| Retail (Special Lines) |
20% |
Vita Group Limited (ASX: VTG) |
52% |
| Food Processing |
17% |
Bellamy's Australia Ltd (ASX: BAL)
Capilano Honey Ltd (ASX: CZZ) |
18% 23% |
Source: Industry ROE data from New York University; ASX company ROE data from 2015 annual reports
The three top earners on the table are Reef Casino Trust (ASX: RCT), Vita Group Limited (ASX: VTG) and REA Group Limited (ASX: REA).
Reef Casino Trust owns The Reef Hotel Casino complex in Cairns. But before we get carried away and go all in with our chips, it should be noted RCT's huge ROE is actually supported by an accounting quirk where 50% of the company's issued units, are actually classified as debt (because of the Trust's obligation to pay out 50% of any profit), artificially reducing equity. Let's move on.
REA Group has no such quirk. In fact REA group has huge amounts of equity, but also significant earnings. It's a standout company, but the company's share price doesn't currently offer much value in my view.
Vita Group is my favourite of the three. If we consider that the company is a big volume seller of phones and consumer electronics through stores, including Telstra-branded stores, it's easy to understand the company's high returns.
Despite its low net profit margins, Vita Group's huge asset turnover ratio (Revenue ÷ Assets) and ability to fund assets without equity drives high returns for investors. Vita Group looks more conservatively priced than REA Group, but is likely more exposed to a downturn in consumer spending.
