I think that some of the best ASX shares are within the S&P/ASX 200 Index (ASX: XJO), and they’re worth a spot in your portfolio.
ASX 200 blue chip shares are strong enough to be able to get through difficult periods like COVID-19. But many of the shares outside of the ASX 20 still have very good growth potential.
Here are two of the most promising ideas at the current prices in my opinion:
EML Payments Ltd (ASX: EML)
EML Payments provides payments in different ways. The ASX 200 share be used by clients for rewards, gifts, incentives and to disburse payouts. It has attractive diversification in how to reach the customer.
Before COVID-19 came along, physical gift cards were a big part of the company’s growth prospects. Obviously social distancing, store closures, consumer cautiousness and a rise of online spending has seen the demand for physical gift cards decline.
So I think this company could be a good way to invest on a shift back to normal life if COVID-19 can be eliminated in Australia or an effective vaccine is produced.
Total revenue increased by 25% to $121.6 million and group earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 10% to $32.5 million.
But even if retail shopping doesn’t quite return, I still think EML Payments is a solid ASX 200 share option. The EML Payments share price is down 23% since 10 June 2020 – to me it’s a much better price. That’s despite management saying June and July trading was encouraging.
Also, the business offers things like online gift cards – this could see a significant boost coming up to Christmas, particularly in the northern hemisphere.
A2 Milk Company Ltd (ASX: A2M)
In my opinion, A2 Milk is one of the highest-quality ASX 200 shares. Selloff opportunities are a great time to buy shares of great businesses. Investing should be about multiple year timeframes, not just a single half-year or even 12-month period.
Long-term investors are being presented with an A2 Milk share price which is down 16.5% since 25 September 2020 and down 28% since 30 July 2020.
I understand why investors decided to sell. The local daigou sales channel is being heavily disrupted by COVID-19 impacts with the heavy lockdown in Victoria and the broader limit on international students and tourists caused by Australia’s border closures.
But A2 Milk can make up for this short-term disruption by continuing to build its China-based business and sell more products locally. The ASX 200 share is seeing success from its heavy investment in marketing in China. It’s gaining market share in the important mother and baby store market across China, with distribution increasing to more stores each month.
Things are also going well in the US. In its most recent trading update, the company said that its performance of the liquid milk business in America was strong. In FY20 it saw USA milk revenue growth of 91.2% with distribution expanded to 20,300 stores.
A2 Milk continues to target an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of at least 30% for the longer-term which is an attractive mix of profitability and investing for growth.
Don’t forget, the company is actually still guiding for growth in FY21. It’s expecting revenue to be between NZ$1.8 billion to NZ$1.9 billion. That would represent growth of between 4% to 10%, up from NZ$1.73 billion in FY20.
But it’s the growth beyond FY21 that makes me think it’s a long-term buy today, particularly with the North American growth. The A2 Milk share price is currently trading at 22x FY23’s estimated earnings.