A common mistake that many novice investors make is to just buy up ASX shares indiscriminately without a clear game plan.
They then end up with a whole pile of stocks that are based on other people's recommendations, without any real strategy of how the overall portfolio would work and when the positions might be exited.
As a counter-example, the Alphinity Australian portfolio managers Andrew Martin and Stuart Welch explained how they have a laser-like focus on earnings and earnings growth.
For them, earnings is ultimately what drives return on equity.
"The thing that drives markets, and what we can get some insight into,… is the earnings," said Martin in a video to clients.
He showed how a portfolio that bought up the top 20% of companies with the best three-month earnings revisions would have returned a stunning 15.1% per annum since 2004.
Over the same period, a portfolio with all S&P/ASX 200 Index (ASX: XJO) companies all equally weighted would have returned 8.1% each year.
So with this strategy in mind, the team nominated three ASX stocks that they most favour at the moment:
Three ASX shares set to grow earnings for years to come
Martin named two ASX shares that are related to the transport sector — Qantas Airways Limited (ASX: QAN) and Carsales.Com Ltd (ASX: CAR) — plus insurer QBE Insurance Group Ltd (ASX: QBE).
He pointed out how all three have outperformed in the past three months, with all of them, not so coincidentally, showing strong earnings growth:
| Stock | 6-month relative performance | 6-month earnings per share change |
| Qantas | +7.5% | +2.1% |
| QBE | +11.2% | +5% |
| Carsales.com | +16.6% | +11.2% |
Welch admitted that historically it's been difficult to invest in airline shares, as the businesses are so cyclical and capital-intensive.
"But there are points in time when everything comes together and you can make money in them," he said.
"We've seen very strong demand for both domestic and international travel, at this point running 120%+ relative to pre-COVID levels."
Qantas shares are up a stunning 42% since their mid-July trough.
Welch said that Carsales.com is "a very well-managed business" that's enjoying yield improvements in both dealer and private advertising, plus the scale to increase fees.
"But also through new product development, which are high yielding and high margin for the business."
To add to the dominant market position in Australia, the company has growth potential yet to be realised in other countries such as South Korea.
The Carsales.com share price is down 16% year to date, while handing out a dividend yield of 2.36%.
According to Martin, after a tough time through the pandemic and heavy rains, the outlook for QBE is "improving quite substantially".
"But it is the first time in a long time that a number of things are going QBE's way."
There are two tailwinds for this ASX share: premium rate increases and interest rate hikes.
"QBE is actually growing its top line [revenue] for the first time in a decade, which is quite a material change," said Martin.
"When rates go up, they can invest in higher rates and therefore get a better running yield. QBE has US$25 to US$26 of those types of investments."
The QBE share price has risen more than 25% since its March trough, while paying out a 2.23% yield.
