Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Medallion Financial managing director Michael Wayne explains the nature of businesses behind the ASX shares he would target right now.
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The Motley Fool: What are the three best stock buys right now?
Michael Wayne: Yeah, it's obviously a difficult one. The companies that we're choosing to focus on, if you were desperate to put money in the market at the moment — which we're not necessarily that keen on doing — but if you're looking to invest at the moment, I think you want to invest in companies with short duration cash flows or short duration earnings.
By that I mean, the companies that are making money and generating good cash flows in the here and the now. As opposed to some of those long-duration growth names, who have great stories but whose value, a lot of the value embedded, is based on future earnings, three, four, five years out.
And we saw that particularly with the likes of, say, your Zip Co Ltd (ASX: ZIP)s, for example, or your Afterpays to some extent. These companies have wonderful stories, enormous amount of growth but a lot of that growth isn't set to convert to cash flow earnings for a number of years to come. Those are the businesses, I think, which are being discarded the quickest and dropping the most harshly — so I think you want to avoid those types of companies.
The three good businesses that we like in the long-term standpoint, which have come back a fair way.
I'll start with a boring one, if you like, but I think a company like CSL Limited (ASX: CSL), for instance, offers good long-term appeal for a lot of investors. It's a large company but still delivering double-digit revenue and earnings growth. We expect that to continue to deliver over the years to come, particularly as plasma collections ramp up again in the post-COVID world. Also, rising unemployment in the US could actually be a tailwind for someone like CSL because in the US, when you go and you donate blood, you actually get paid for it. But also, they are a US dollar earner so they generate their revenues and a lot of their earnings in US dollars and you convert that back to an Aussie dollar share price, it's a tailwind, particularly when you see the Aussie dollar come back as much as it has.
That's a business that ticks all the boxes when looking at the balance sheet, looking at the revenues, the earnings, the margins, the number of growth opportunities within that business is phenomenal. We're comfortable in picking that up in the long-term horizon.
Another business reported very well during earnings season is a company called Altium Limited (ASX: ALU) — it's a tech business. They actually provide the technology which is used to produce plastic circuit boards. The growth of their new product, Octopart, was very strong and management's conviction in hitting their FY26 targets has increased significantly because this is a business that has transitioned away from their old fee structure towards a more software-as-a-service, annuity-type fee structure. I think that'll put the company in good stead going forward as well.
Finally, another interesting tech business, a company called Audinate Group Ltd (ASX: AD8). This is a company which has delivered some very good revenue growth numbers. It's not profitable just yet but in time, it's expected that it will turn profitable. They're looking to target $100 million of earnings by 2025, up from about $46 million in revenue today. That's a business with a long-term growth path. Effectively, they have a protocol, which is embedded into numerous electronics goods and products around the world. It allows those pieces of equipment to communicate without the need for cords. Just think about outdoor entertainment, sporting events, concerts, that sort of thing. A lot of the technology is used in those places but basically, 80% or 85% of new electronics hitting the market from brands like Toshiba, Bosch for instance, all embed Audinate's protocol.
I think, in time, they're going to not only continue to outperform their opposition but I think the adoption rate is about 15 times the nearest competitor — it's got a significant competitive advantage there. They're also now looking to diversify away from a pure reliance on the audio-digital space to the visual-digital space and that also will open up an untapped market for them.
MF: I'm an Audinate shareholder myself and, I tell you what, it was in some strife back in May but it's recovered really well since, hasn't it?
MW: Yeah, they were caught with a bit of a negative update towards the beginning of the year. They're one of these businesses who have an enormous order book, so there's enormous demand in place but they were struggling to meet that demand. They were struggling to get supply of certain chips that they required and they were one of the many victims globally that suffered from the freezing up of the microchip market and the delays in shipping, et cetera.
But a lot of that has now been worked through and the company is starting to really ramp it up and be able to overcome some of those hurdles they were facing earlier in the year.
Fingers crossed it can recover back towards that $10 mark, where it got to briefly a few months ago. I think it's a good long-term play [with] almost an unregulated monopoly in its space.
