Share prices are constantly moving around. In my opinion, this can mean that opportunities can be found every day. With that in mind, I'm going to write about a few things that indicate to me an ASX stock is worth investing in.
A change in valuation, whether that move is up or down doesn't necessarily tell me whether a business is worth buying today. But, there are a few things that I want to look for.
Increasing profit potential for the ASX stock
When I'm looking for opportunities, I want to see a future where a business could be much more profitable than it is today (or expected to be in FY24 as there may be some profit declines due to the economic challenges).
I think seeing that good potential for the future is important because profit growth is what is likely to drive the share price higher. Stronger profits could also lead to bigger dividends in upcoming financial years.
Revenue growth in most years is an essential thing I look for because it helps profit growth, though revenue doesn't need to rise every single year.
Improving profit margins can also help grow profit at an appealing pace. I like to focus on businesses that are looking to increase their scale, open more locations, create a new growth avenue or do something that will help earnings. Being exposed to a useful tailwind is also attractive, such as Australia's ageing demographics.
Undervalued for what it might achieve
It seems obvious to say, but I'd only choose to add businesses to a 'best ASX stocks to buy' list if it seems the market isn't appreciating how much potential a business has.
The undervaluation could be apparent in a few different ways. An ASX stock could be trading at a double-digit discount to its net asset value (NAV). It might be trading on a lower-than-expected price/earnings (P/E) ratio. Or, the share price could have fallen noticeably even though revenue/profit continues to grow.
I recently wrote an article that mentioned one ASX share for each of those possible undervalued factors.
Increasing market strength
I prefer to look at ASX stocks that have a good market position but have the ability to increase their market share, or at least improve their standing with the current customers that they have.
There is quite a lot of competition in a number of sectors, so I'm looking for businesses that are working on providing a better service (such as offering new or improved modules) like Altium Limited (ASX: ALU) and Volpara Health Technologies Ltd (ASX: VHT) are doing.
Some companies might be working on strengthening their supply chain, stock flow and availability with new advanced warehouses such as Coles Group Ltd (ASX: COL) and Metcash Ltd (ASX: MTS).
Offering customers better and/or faster delivery options could also be a good improvement, such as the Wesfarmers Ltd (ASX: WES) OnePass initiative.
