I love investing in undervalued ASX shares because I believe that gives me the best chance of capital gains.
Ideally, I want to choose businesses that I expect to grow their earnings, because that makes it easier for the investment to play out positively. It can be a dangerous move to choose a company that is expected to see earnings decline.
While it's not certain what my next investment move will be, I am quite confident that my first idea will be the next investment I make because of how optimistic I am about it. I'll explain why below.
Image source: Getty Images
Accent Group Ltd (ASX: AX1)
Accent is a sizeable retailer of footwear in Australia. A significant portion of its earnings comes from distributing/retailing shoes from global brands in Australia and New Zealand, such as Skechers, Hoka, Vans, Ugg, Lacoste, Dickies, and more.
The company also has its own businesses, including Hype, Subtype, Glue Store, The Athlete's Foot, Platypus, Nudy Lucy, Stylerunner, Article One, and Ode.
I'm very optimistic about the new agreement with Frasers to open Sports Direct stores in Australia and New Zealand. In FY26, it expects to open three physical Sports Direct stores and the website, reaching 50 stores in the first six years, and there's an opportunity of 100 over time. These will be large stores offering numerous global brands and Frasers brands (such as Everlast, Karrimor, Lonsdale, Slazenger, and Hot Tuna).
I think the Sports Direct Stores can help significantly increase Accent's earnings in the coming years, alongside organic growth from the various Accent-owned businesses and distribution agreements with existing global brands.
I think the ASX share is significantly undervalued for how much profit could grow in the coming years. According to the forecast on Commsec, at the time of writing, it's priced at 12x FY26's estimated earnings and under 10x FY28's estimated earnings.
VanEck Morningstar Wide Moat ETF (ASX: MOAT)
This is an exchange-traded fund (ETF) that aims to invest in some of the best businesses in the US.
There are two elements that go into picking businesses for the portfolio.
First, the businesses must have a wide economic moat. An economic moat refers to the competitive advantages a business has, which can come in different forms such as network effects, cost advantages, intellectual property, licenses, and so on. A wide economic moat means Morningstar analysts believe the business is more likely than not to make strong profits in two decades from now.
That leaves a group of excellent businesses to choose from. However, businesses are only picked for the portfolio when they are trading at an attractive price relative to what Morningstar analysts think is an appealing valuation.
I'm calling this an ASX share because we can buy it on the ASX.
This investment strategy has clearly done well – over the past decade, it has returned an average of 15.2% per year, which is a strong rate of compounding. Past performance is not a guarantee of future returns, of course.
Plus, it has more than 50 holdings, which I think provides effective diversification and helps lower risks.
