The fortunes of ASX shares in 2022 have been dominated by economic issues, whether that would be inflation, interest rates or recessions.
But, of course, stocks are a slice of ownership of a company, so the underlying business does actually matter in the long run.
So while everyone else is distracted by macroeconomic concerns, the team at Auscap Asset Management is focusing on what's under the bonnet.
"For most high-quality businesses, particularly those with structural tailwinds and high returns on invested capital, our view is that what is occurring inside the company is often more important than what is happening in the broader economy," read its memo to clients.
"We think this is true of most companies that are owned within the fund."
The Auscap analysts presented a few examples and explained why they have such conviction in each:
'Clear market leader in Australia' pushing into the US
Reece Ltd (ASX: REH), according to Auscap analysts, is "one of the highest quality industrial businesses on the ASX, with a long history of resilient growth through market cycles".
"It is the clear market leader in Australia, where it focuses on the construction, renovation and repair plumbing markets," read the memo.
"Reece delivered what we consider to be a very strong result during FY22, with net profit after tax up 37% on sales growth of 22%."
However, the real catalyst at the moment is expansion within the "highly fragmented" US market, which was kick-started with a 2018 acquisition.
"The US business continues to demonstrate that it is a huge opportunity for the company, with sales growth of 33% for the year," the memo read.
"Reece has 645 store branches in Australia compared with 204 in the US, and domestic margins are currently roughly double that of the US division."
The market has been harsh on Reece recently, almost halving its share price since the start of the year.
The Auscap attributes this to worries about supply cost inflation and the negative impact of higher interest rates on housing markets.
"Although there is currently cyclical uncertainty across all of Reece's end markets, we have taken advantage of the recent market sell off to rebuild the fund's Reece position at what we believe to be attractive long-term prices."
Supercharging lithium revenues
The bullish prospects for lithium is making Mineral Resources Limited (ASX: MIN) a compelling investment for the Auscap team.
"The lithium price… continues to make new highs due to an incredibly strong structural demand outlook.
"Global demand looks reasonably likely to exceed supply for the foreseeable future."
Auscap analysts noted that since February this year Mineral Resources started producing processed lithium hydroxide rather than just the raw lithium spodumene.
"MinRes is therefore able to monetise more of the downstream lithium supply chain through a vertically integrated model," read the Auscap memo.
"MinRes intends to convert all of its share of the mined lithium spodumene into lithium hydroxide. This conversion delivered EBITDA of US$154 million on lithium hydroxide sales of 6.7kt in the last quarter of FY22."
The company is aiming for production of 118ktpa over the medium term.
"We continue to be very positive about MinRes' outlook and we anticipate many years of transformational progress across each of MinRes' four divisions: Mining Services, Lithium, Iron Ore and Energy."
Share are too cheap as slowdown is 'overemphasised'
The Auscap team felt furniture provider Nick Scali Limited (ASX: NCK) delivered a 2022 result ahead of expectations and continues to sell well in the current financial year.
"New sales orders [are] up 60% on pre-COVID-19 levels for the Nick Scali stores despite macroeconomic uncertainty."
The acquisition of sofa seller Plush holds much potential.
"At its FY22 results presentation, Nick Scali management flagged upside to its estimates for Plush synergies, continued strong double digit online order growth of 59.9% year-on-year and an aggressive store rollout plan, with targets to nearly double the store network across its two brands over time."
At just 10 times forecast earnings, Nick Scali shares are going for cheap at the moment, according to Auscap analysts.
"Most analyst concerns centre on an interest rate and housing related slowdown in furniture sales following the COVID-19 induced boom," read the memo.
"While we are cognisant that this may occur, we suspect that the impact of any slowdown in sales is overemphasised."
