ASX growth shares could be the best place to put our money because of their ability to compound earnings and deliver impressive shareholder returns.
In this article, we'll examine two stocks that Wilson Asset Management (WAM) fund managers are excited about. WAM usually searches for undervalued ASX growth shares with a catalyst that could raise the market's valuation.
WAM runs a number of listed investment companies (LICs), including one of the ASX's largest – WAM Capital Limited (ASX: WAM). In a recent webinar, WAM lead portfolio manager Oscar Oberg and portfolio manager Tobias Yao revealed some of their highest-conviction picks.
A2 Milk Company Ltd (ASX: A2M)
A2 Milk sells dairy products that only have the A2 type of beta-casein protein that comes from certain cows that don't produce the A1 protein. The company sells products like infant formula, liquid milk and milk powder. It claims to be the brand leader of fresh liquid milk in Australia. It also has a large presence in China for infant formula and a presence in North America for liquid milk.
One of the largest positions in the WAM Capital portfolio is A2 Milk. The WAM team said they had done an "incredible amount of work" on A2 Milk, including visiting China three times in the last 18 months to help with on-the-ground due diligence.
The fund manager said A2 Milk had suffered a "hiccup" during August due to a supply chain issue, but noted that consumers see the brand as a premium product.
However, WAM believes the company's underlying momentum and demand for its products have continued, enabling the business to win market share. The investment team pointed out that the ASX's growth share is entering other regions, including Vietnam and the Middle East, while also growing its presence in the US.
Another positive about the company is its "very very strong balance sheet", which gives it optionality. The investment team concluded their bullish outlook with the following:
So, A2 Milk, we think over the next 12 months looks very exciting.
G8 Education Ltd (ASX: GEM)
G8 was another pick highlighted by the WAM team. The company describes itself as one of Australia's largest providers of early childhood education and care, with over 400 early learning centres and more than 10,000 team members. WAM called the stock a value play.
Oscar Oberg believes the management team has done a very good job over the past two years, trying to turn the business around in a "really hard environment" due to cost-of-living pressures and other factors.
Specifically, the fundie noted G8 Education has worked hard recently to take costs out of the business and improve performance and profit margins.
Oberg noted that WAM's aged care picks had worked well following increased funding for the sector. He believes "the exact same thing has happened here in childcare, there has been a 15% increase in the award wage and the government has effectively funded it."
WAM thinks the sector can now "generate real strong operating leverage" and boost the bottom line.
The fund manager suggested that G8 Education has very low debt, is buying back its shares, and is "getting rid" of loss-making centres.
WAM also believes that the Liberal party will eventually announce a better-than-expected childcare policy. Oberg suggested that "investors effectively get a free option on that".
In terms of valuation, Oberg suggested the price-earnings (P/E) ratio of the ASX growth share is around 12, and earnings are growing at 15%, with cost savings driving "substantial earnings upgrades".
