With the ASX 200 financial reporting season officially wrapped up for 2019, here are two key lessons that every investor should know about now that the dust has settled.
1. Quality over valuation and market cap
High quality, well-run businesses with strong management will outperform, irrespective of market noise, geopolitical tensions and macroeconomic issues. The immediate names that come to mind are CSL Ltd (ASX: CSL) and REA Group Ltd (ASX: REA). CSL delivered a phenomenal 17% growth in net profits and 11% increase in revenues, while REA Group saw a 6% lift in profits and 8% increase in revenues in light of challenging market conditions nationwide.
CSL anticipates that its FY20 net profit will grow a further 7–10%, despite a one-off financial headwind of transitioning to a new model of direct distribution in China. Underlying profit growth should be higher than its anticipated 7–10%. Likewise, REA Group continues to focus and invest in growth initiatives, efficiency gains and cost management during this period of housing market recovery. This is contrary to the belief that large cap companies are not able to grow or provide as significant shareholder return as smaller companies.
The WAAAX index holds the same theme of high quality stocks that boast an expensive valuation and large market cap. However, if reporting season has taught me anything, it's that these companies are leaders in their respective fields, with strong conviction of meeting medium- to long-term business objectives that will deliver significant shareholder value.
Altium Limited (ASX: ALU) reported an FY19 revenue of US$172,000 with a subscriber base 43,600 for its printed circuit board design tool software. The company is ambitiously targeting 100,000 subscribers and US$500 million in revenue by 2025. Likewise, the Afterpay Touch Group Ltd (ASX: APT) is going from strength-to-strength, honing in on its FY22 target of $20 billion in sales. The company has seen all its metrics – such as active customers, revenue and income – more than double on the prior corresponding period.
2. Avoid companies with low cash or high expenditure
Some companies can justify an abnormal or high level of expenditure – for example, A2 Milk Company Ltd (ASX: A2M), which is making a significant investment in the development of its brand awareness across its Asia and United States (US) business segments. While investors might not agree with the fact that marketing investment represents 10.4% of sales, it is the marketing that drives its sales and paves way for sustainable growth. Likewise, newly listed corporate bookmaker, PointsBet Holdings Ltd (ASX: PBH) has just started its operations in the US. This requires a significant marketing and promotional outlay, as evidenced by their full year report that saw significant expenditure in promotions despite strong turnover growth.
However, there are companies that are at dangerous levels of expenditure or low on cash. This may signal that the company could require a capital raise to continue its growth trajectory. LiveTiles Ltd (ASX:LVT) delivered a strong revenue growth of 218% but saw its net loss increase by 93%. Investors need to pay close attention to the nature of capital spend and if the company has a sustainable business model.
