The fund manager in charge of Spheria Emerging Companies Ltd (ASX: SEC) has revealed some of the ASX shares that it thinks look like good ideas at the moment.
Spheria's investment philosophy is to buy companies with cash generative business models, with a demonstrated track record of solid returns at a sensible valuation given their industry dynamics and positioning.
Whilst Spheria believes that the world can overcome COVID-19, the threat of inflation and emerging signs of reluctance by central banks to "pump prime" to the same extent as they have since the emergence of COVID-19 means the fund manager is focusing its efforts on finding business models with pricing power and trying to avoid those that are likely to see unexpected compression in profit margins, such as mining contractors.
In this era of high levels of corporate activity with lots of liquidity, "procyclical" boards and record levels of private equity funding, Spheria thinks it's well placed to benefit. That's because of its focus on undervalued, cash-generating businesses with decent balance sheets.
Spheria is avoiding ASX shares that are overvalued and it's trying to maximise the risk-reward equation for investors with a disciplined investment approach that is predominately guided by valuation fundamentals.
Ainsworth Game Technology Limited (ASX: AGI)
Ainsworth is a gaming machine manufacturer and supplier. It offers the types of machines that you may find in casinos.
Spheria noted that whilst the company has been heavily impacted by COVID-19, it has never been in danger of insolvency because of property holdings in the US that at one point exceeded its market capitalisation.
The fund manager pointed out that in the US (and Australia), the end market of casinos, pubs and clubs have/had recovered strongly and in many case are now/were in a position to recommence expenditure on new machines. The company returned to profitability in the second half of FY21.
Spheria believes that the ASX share has the potential to leverage its portfolio and intellectual property and regulatory approval to improve earnings and surpass what it was making before COVID-19 came along.
City Chic Collective Ltd (ASX: CCX)
This ASX share is a retailer of plus-size clothes, footwear and accessories. It has a number of different brands including City Chic, CCX, Avenue and Evans. City Chic is now making a majority of its sales online.
Spheria said this business appears to be well positioned to benefit from the re-opening across the countries that it has major operations in (mainly the UK, the US and Australia). It can also benefit from the significant bounce back in apparel expenditure, which has been hurt by lockdowns in the UK and US in-particular, that is accompanying this trend.
According to Commsec, the City Chic share price is valued at 31x FY23's estimated earnings.