I believe every ASX share I invest in has the potential to beat the market over the medium-to-longer-term, though it doesn't always turn out that way. 2023 had plenty of difficult conditions to contend with for some stocks, including interest rate hikes and inflation.
However, I think 2024 looks very promising for the two ASX shares I'm going to talk about.
The next 12 months could go well. the next two or three years may also be promising for these ASX stocks, which is why I'm invested in them.
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Pinnacle Investment Management Group Ltd (ASX: PNI)
Pinnacle invests in fund managers — which it calls 'affiliates' — that can demonstrate "growth potential" and whose management teams have strong track records.
Those fund managers target a variety of asset classes, including ASX shares, global shares, 'real' assets and credit.
Pinnacle aims to help those affiliates grow with a number of different services, including seed funding, global institutional and retail distribution, and industrial-grade middle office and infrastructure services.
The last two years have been tough for Pinnacle shares because rising interest rates hurt asset valuations. This may have encouraged some investors to pull out their money from fund managers and dissuaded others from investing with the fund managers.
In the second half of FY23, Pinnacle saw $3.1 billion of net inflows. The 2023 financial year saw aggregate affiliate funds under management (FUM) finish at $91.9 billion (up 10% on FY22).
It can expand its portfolio by adding new affiliates, and existing affiliates can open new funds.
With interest rates appearing to be close to the peak, this could create a more supportive environment for asset prices to stabilise (or even rise) and also attract more FUM inflows for the ASX share.
According to the forecast on Commsec, the Pinnacle share price is valued at 21x FY25's estimated earnings.
Duxton Water Ltd (ASX: D2O)
This company owns water entitlements and leases them to agricultural operators through a variety of different options, including long-term entitlement leases, forward allocation contracts and spot allocation supply.
At the end of October, 52% of its permanent water portfolio was leased to Australian farm businesses.
There has been plenty of rainfall over the last year or two, which has put pressure on water prices.
However, the arrival of El Nino means a likelihood of hotter and drier weather. October 2023 was the fifth-driest on record and the driest since 2002 in terms of national rainfall.
However, at this stage, water storage is still at high capacity from earlier rainfall. At the end of October, Murray Darling Basin storages were at 92% capacity. The northern basin storage was at 94%, and the southern basin storage was at 93% for October 2023, down from 109% and 99% last year, respectively.
As rainfall and water storage reduce, I think this could mean water prices rise.
Duxton Water's half-yearly dividend has increased every six months since it started paying one at the end of 2017.
Interestingly, the company recently announced it was buying $39.1 million of high-security water entitlements from Treasury Wine Estates Ltd (ASX: TWE). It's expecting to increase its half-year dividend for the next two payments, which would translate into a grossed-up dividend yield of 6.5%.
