2 sleeping ASX shares ready to break out

ASX shares purchased while the rest of the market hasn’t realised its long-term potential is every investor’s dream. Here are two examples.

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Watering two small seedlings, indicating share price movements for ASX growth and value shares

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A fund manager has named 2 ASX shares that are “unloved” by the market but have the makings for long-term outperformance.

According to Prime Value Asset Management portfolio manager Richard Ivers, his fund’s best investments are those that are misunderstood by a market that can be excessively focused on short-term fortunes.

“We think of it like planting a seed,” he posted on Livewire this week.

“We expect that investment to sprout and grow over time. However, the timing of this ‘sprouting’ is hard to predict as it is dependent on others in the market also recognising value in the underlying asset and bidding up the stock price to reflect it.” 

This dependency on other investors to ‘wake up’ means investment performance will fluctuate over time.

“In some periods, many seeds will be sprouting at once, while at others we are planting many seeds but few are sprouting,” said Ivers.

“Consequently, investment performance should be judged over the long term – not monthly or quarterly.”

Here are 2 ASX shares Ivers’ fund currently holds. The first recently sprouted, while the second is just about to:

Mortgage Choice Limited (ASX: MOC)

A prime example of a sleeper suddenly sprouting was in March when this home loan broking business received a takeover proposal from REA Group Limited (ASX: REA).

Mortgage Choice shares gained 61% that day. 

“This followed from a weak February when the stock was -13% on a reasonable but underwhelming profit result,” said Ivers.

“Clearly, a stock price can vary significantly from day to day while the underlying value moves more slowly. This creates opportunities for longer-term investors.”

The Mortgage Choice business has a high level of recurring revenue and “very strong cash flow“, according to Ivers.

“Prior to the bid, it was yielding 7% fully franked and growing its cash earnings.”

Mortgage Choice shares were flat on Wednesday afternoon, trading at $1.92. 

United Malt Group Ltd (ASX: UMG)

United Malt is the world’s 4th largest provider of malted barley, which is an ingredient used for beer and whiskey production.

Ivers said it had provided “a moderate return” since his fund’s purchase, but has certainly underperformed compared to the rest of the portfolio.

“However, we believe the outlook has improved. That is, UMG appears to be a seed that has not yet sprouted.”

With 60% of its revenue coming from the United States, the vaccination rollout there should see alcohol consumption increase as the economy reopens.

“Yet the stock is well below its high of late 2020 and valuation looks appealing.”

This unfulfilled potential makes it unique compared to other COVID-recovery ASX stocks.

“[United Malt] contrasts with travel stocks, many of which are above their pre-COVID high and exposed to a slower Australian vaccination program,” said Ivers.

“Further, UMG benefits from the longer-term structural growth of craft beer and its demerger from Graincorp Ltd (ASX: GNC), which will deliver efficiencies and higher return on capital. Over time we expect the underlying value to be reflected in the stock price.”

United Malt shares were down 0.49% on Wednesday afternoon, trading at $4.06. 

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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