The S&P/ASX 300 Index (ASX: XKO) will welcome 14 ASX shares to the family this month.
While its sister S&P/ASX 200 Index (ASX: XJO) is the flagship index for gauging how the Australian share market is going, the ASX 300 still plays an important role.
Any business that enters the ASX 300 can proudly declare it has "made it" to the big time, according to QVG portfolio manager Chris Prunty.
"The 300 is the benchmark that index funds such as the $9.6 billion Vanguard Australian Shares Index ETF (ASX: VAS) seek to replicate," he posted on Livewire.
"It's also the pool that many quantitative and institutional managers tend to use as a cut-off for their potential investable universe."
Not all index entrants are quality
Prunty, however, is disturbed at the latest cohort of ASX shares to be admitted.
"The most interesting thing about the most recent set of 300 entries is the lack of quality," he said.
"Just 4 of the 14 companies going into the 300 are profitable."
He took $2.8 billion index entrant AVZ Minerals Ltd (ASX: AVZ) as an example of how climbing market capitalisation doesn't equate to a good investment.
"AVZ Minerals is a lithium developer operating in the Democratic Republic of the Congo," he said.
"To AVZ's credit they have a monster deposit but our enthusiasm is tempered by the fact the DRC ranks 175 out of 189 countries on the 2020 Human Development Index and is one of the most difficult mining jurisdictions in the world."
The adverse operating environment and "no meaningful cash flow" until financial year 2024, also puts off Prunty's team.
The good, the bad and the ugly
The QVG team calculated that these 4 ASX shares are the only entrants to the ASX 300 that are turning a profit:
- Aussie Broadband Ltd (ASX: ABB)
- APM Human Services International Ltd (ASX: APM)
- MA Financial Group Ltd (ASX: MAF)
- PWR Holdings Ltd (ASX: PWH)
Considering this is such a small minority of the stocks joining the index, Prunty warns investors to be mindful when considering buying any of the entrants.
"Be aware there are technical factors such as index inclusions that can drive share prices well above fair value. Don't get caught up in thematic mania, or if you can't help yourself, keep your bets small," he said.
"If you buy an index product, be aware you're buying the good, the bad and the ugly."
