After a brutal 2022, it's no surprise investors are still anxiously obsessed with inflation, interest rates and geopolitics.
But the team at QVG Capital is urging investors to forget all that, because there is only one thing that matters this year.
"2023 will be all about earnings," stated a QVG memo to clients this week.
"We think future returns will be dictated by earnings. Worrying about rates and valuation, risks fighting the last war."
The secret sauce for buying stocks right now
To demonstrate how critical earnings are, the QVG analysts took the example of OFX Group Ltd (ASX: OFX).
The share price for the currency exchange tanked 18% in just one week in January after its latest financial results.
"The update showed softness in the consumer portion of OFX's revenues," read the memo.
"Even minor misses, such as OFX Group [last] month, will be punished."
The QVG team's secret sauce in buying ASX shares this year is to seek out businesses that have a very specific set of attributes.
"We believe the job to be done then is to own the relatively small number of companies run by motivated insiders that produce growing free cash flows," read the memo.
"If we are right on our earnings forecasts on the durable growers and pay a low enough price for the through-the-cycle cyclical growers, then 2023 ought to look a lot different to 2022."
Two ASX shares set to grow earnings
Two examples of such ASX companies expanding their cash flows and earnings are Imdex Limited (ASX: IMD) and Hub24 Ltd (ASX: HUB).
Imdex, in fact, has the opposite month to OFX, enjoying a 13.1% boost in its share price after a well-received quarterly update.
The mining technology provider also has an acquisition in progress.
"Imdex announced a large capital raise to fund the acquisition of a complementary Norwegian business called Devico.
"Devico is a higher margin, higher growth business than Imdex and increases the skew of earnings to higher intellectual property drilling tools from more commoditised drilling fluids."
The QVG team admitted Imdex was not usually its cup of tea, but the current tailwinds were too hard to resist.
"We typically have little interest in commodity-exposed businesses, given their low through-cycle returns," the memo read.
"However, Imdex is atypical in this regard. Its products have significant intellectual property, can sustain above-industry growth rates and also sustain above-industry returns on capital."
As for Hub24, its share price remains flat for the year, but QVG absolutely loved the inward flows update released last month.
"We were — quietly — bracing ourselves for a soft flows number, given investor sentiment was awful in the December quarter and seemed to deteriorate as the quarter went on," read the memo.
"As it turned out, Hub24 added $2.8 billion of net inflows – a great effort and one that looked even better when Netwealth Group Ltd (ASX: NWL) and Praemium Ltd (ASX: PPS) subsequently released their flows."
This market positioning will serve them well in the coming years, according to QVG analysts.
"Part of our thesis on HUB is that they'll grow earnings faster than revenues in the future as they benefit from scale."
