A fundamental idea behind investing is that great reward usually can't come without commensurate risk.
After all, who in the world is just going to hand you free money? You have to earn it.
If you're a regular The Motley Fool reader and already have a portfolio of ASX shares, you already know and accept this.
You've chosen to invest in equities knowing that it is more risky than term deposits or bonds — but the long-term returns are likely to be more satisfying.
With this attitude in mind, Shaw and Partners portfolio manager James Gerrish recently sifted through some stocks that have been unloved this year.
"We think a basket of the underperforming stocks from August could deliver solid returns into Christmas, assuming we can buy them into fresh 2022 lows."
He found two that could be excellent risk-reward propositions:
Image source: Getty Images
Conservative outlook could be a chance to buy in
Credit Corp Group Limited (ASX: CCP) is an old-school finance company that buys debts from other businesses to chase and collect them itself.
Its share price has, unfortunately, almost halved since the start of the year.
Going into reporting season, Gerrish's team was "mildly bullish" — but the annual result did not flatter the company.
"Their profit result equated to a 14% increase on FY21 which was a solid outcome, however, their guidance for FY23 was the issue – they are guiding to a lower net income of $90 to $97 million," Gerrish said in his Market Matters newsletter.
"Weak guidance has been the largest weight on the ASX through August reporting season as management has been conservative in their outlook."
Having said this, Gerrish likes the potential returns if the stock can dip to the $18 mark. Credit Corp closed Wednesday at $18.59 a share.
"On 13.7x FY23 earnings Credit Corp is still around fair value in Market Matter's view but… we can easily see ~30% upside – note the stock traded ex-dividend 36c fully franked," he said.
"We like the risk-reward towards CCP into fresh 2022 lows."
'Worst of the headwinds could be behind the business'
Chicken producer Inghams Group Ltd (ASX: ING) has really had a tough time of late with supply chain issues, COVID-19 staff absence, La Nina, and input cost inflation.
According to Gerrish, the misfortunes were borne out in the August results.
"Profit fell almost 60% to $35 million, well below the consensus of $43 million, despite volumes increasing more than 4%," he said.
"Painfully the company said consensus expectations were too high for FY23 and we should expect downgrades of up to 10%!"
Unsurprisingly, the Ingham share price has lost more than 20% since 12 August. It's lost about a third since the start of the year.
Gerrish feels like this could be a discount worth investing in.
"On a valuation of 16.2x FY23 (depressed) earnings, the risk-reward is improving especially as we believe the worst of the headwinds could be behind the business."
He added a nice entry point would be below $2.50. Ingham closed Wednesday at $2.48 a share.
