The next ASX share ready to join the 20-bagger club: expert

One professional breaks down what ‘hall of fame’ stocks have in common, and names one that has massive potential to be the next star.

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Long-time investors would be well aware of the ASX shares that have put smiles on the faces of shareholders over many decades.

The team at QVG Capital likes to call them the ‘ASX Hall of Famers’.

“Names like REA Group Limited (ASX: REA), CSL Limited (ASX: CSL), Aristocrat Leisure Limited (ASX: ALL), Reece Ltd (ASX: REH), Cochlear Limited (ASX: COH), Domino’s Pizza Enterprises Ltd (ASX: DMP), ARB Corporation Limited (ASX: ARB), Resmed CDI (ASX: RMD), and JB Hi-Fi Limited (ASX: JBH) are all undisputed ‘winners’,” QVG portfolio manager Chris Prunty posted on Livewire.

“All these companies have been at least 20-baggers with CSL and REA returning over 100x to patient shareholders.”

So what makes a hall of famer?

Prunty’s team’s analysis showed up 3 specific attributes these evergreen stocks had in common:

  • High return on capital combined with revenue growth
  • Pricing power or unit economics that “crush the competition”
  • Strong balance sheet

“What’s clear from the data is that high returns on capital and compounding revenue growth for many years in the teens is the ‘secret’ to gaining access to this elite cohort.”

So that’s all fine, but the existing Hall of Famers have already had their exponential growth.

How do you find the next one?

A prime candidate for the Hall of Fame

Prunty singled out Objective Corporation Limited (ASX: OCL) as a stock that’s bound for the hall of fame.

To be fair, Objective has already served investors pretty well, rising more than 680% over the past 5 years.

“But the combination of very low customer churn and consistent reinvestment in product R&D means that we think Objective can continue to grow revenue in the mid-teens for many years.”

Last year, NAOS Asset Management portfolio manager Robert Miller told The Motley Fool that he would hold Objective shares for years to come

“They are continually reinvesting in the product and the software offering to make it a benefit for their customers, which in turn drives growth, which they in turn reinvest back in the businesses, and it becomes a bit of a perpetual cycle like that.”

The Objective share price has fallen just short of 17% this year to date, presenting a buying opportunity.

According to Prunty, the drivers for long-term returns are quite different to making a quick buck on the share market.

“In the short-term, the change in multiple — or sentiment — accounts for almost half the returns from holding a stock,” he said.

“However, as time frames extend beyond a year, fundamentals such as revenue growth and margins — the sum of which is earnings growth — come to dominate as the source of returns.”

He added that hall of famers also have low debt.

“The maths is irrefutable. If we can identify companies that can deliver these numbers for many years and are patient enough to hold them, then good things will happen.”

Motley Fool contributor Tony Yoo owns CSL Ltd., Cochlear Ltd., and ResMed Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended CSL Ltd., Cochlear Ltd., and Objective Corporation Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended ResMed. The Motley Fool Australia has recommended ARB Corporation Limited, Cochlear Ltd., Dominos Pizza Enterprises Limited, REA Group Limited, and ResMed Inc. 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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