The old saying about 'all boats rising on an incoming tide', applies equally when it comes to listed shares. Even 'not so good stocks' get a leg up when the bulls are running, and the opposite also tends to be true.

The fundamentals have been thrown out the window in response to the COVID-19 crisis. As a result, we've seen that many ASX shares have become beneficiaries of JobKeeper, Jobseeker, plus central bank policies, and other government stimulus measures.

Depending on sector, some ASX shares are more directly riding the coattails of the measures to prop up our ailing economy. Revelations of further stimulus measures, including the continuation of JobKeeper well into next year, represents more 'pennies from heaven' for some ASX shares.

Australians are spending more on the basics

Recent Australian Banking Association figures show that 429,900 mortgages had been deferred, totalling $153.5 billion, since mid-May. But during this time, a number of measures have also turbocharged household spending. These measures include JobKeeper and JobSeeker payments. Adding further stimulus to spending, 1.4 million people have tapped into $10,000 of super, while a selected cohort of Australians have also received a $750 lump sum payment from the federal government.

As a result, during the pandemic we've seen food delivery, hardware, and online electronics retailers receive the strongest kickers of all the ASX sectors, aside from healthcare. For example, based on data gathered by AlphaBeta Australia, spending on food delivery was 230% higher than normal in the week of 11 to 17 May. It has also been 200% above normal for 3 consecutive weeks. With people spending so much more time at home, spending on DIY jobs is up to 40% above normal.

I've identified 2 ASX shares that I believe will continue reaping the benefits of these stimulus measures.

Reject Shop Ltd (ASX: TRS)

The Reject Shop share price has bounced from a low of $2.40 on 27 March to its current price of $6.10, after soaring as high as $8.28 per share in early July. Sales during the height of coronavirus pandemic (nationally), between 24 February and 15 March were up 15.1% compared to the same period in 2019. Cleaning, groceries, toiletries and pet care proved to be the strongest categories.

The $64,000 question is whether the discount variety retailer can continue to sustain this growth over the longer-term. All eyes will be on the 2021 guidance that accompanies its full year result.

While Reject's 351 stores across Australia have combined annual sales of $900 million, a slide in earnings over the last 3 years can be attributed to the overstocking of too many low-margin items that simply haven't been moving off the shelves fast enough. New CEO Andre Reich plans to staunch this slide in earnings by shrinking the product range by as much as 75%, and cutting inventories by a third.

The share's recent upgrade by Morgan Stanley to overweight is encouraging, and based on Morningstar's analysis the Reject Shop share price is undervalued, with fair value set at $8.28.

Wesfarmers Ltd (ASX: WES)

Unlike a lot of stores, Wesfarmers kept its 4 retailers Kmart, Bunnings, Target and Officeworks open for trading during the coronavirus pandemic. That didn't stop the Wesfarmers share price from tumbling from $47.25 on 20 February to a COVID-19-induced low of around $31.02 per share on 23 March.

But it has since regained virtually all its lost ground to trade at $46.23.

In testimony to its resilience during the worst of the pandemic, the iconic Australian retail group's Bunnings and Officeworks stores experienced significant sales growth. They recorded 19.2% and 27.8% jumps, respectively, in the quarter ended June 2020. Equally important, Kmart and online marketplace Catch, also recorded growth in the second quarter.

Only Target registered a (minor) drop in sales. Management expects nearly half of its Target stores to close or be converted into the more successful Kmart model. It's also using the COVID-19 opportunity to renegotiate lease terms around Australia.

Wesfarmers has already tipped the market to expect its full financial year report on online sales across all of its brands – on a fiscal year-to-date basis – to be up 60% to $1.9 billion. Confirmation of this result when it reports its full year result on 20 August, plus any supporting commentary outlining future plans for Kmart and Catch could push the share even higher.

Trading at a price-to-earnings ratio of around 24x, Wesfarmers shares aren't cheap. Yet there I think there are some drivers of future share price appreciation. These include: a) additional upside from a continued improvement of its existing businesses; and b) the launch of Bunnings' full digital offering in 2020, which is likely to significantly boost margins and sales.

The post 2 ASX shares that have benefitted from measures to reboot the economy appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the shares mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The risks associated with listed entities are a lot higher than low-risk term deposits, which are protected by the Australian Government's Financial Claims scheme for amounts of up to $250,000.

But, given that the returns from ASX shares can also be a lot higher, here are 2 options that, in my opinion, are worth considering as surrogates for fixed income.

Magellan Infrastructure Fund (ASX: MICH)

This actively managed diversified infrastructure fund invests in a portfolio of 20 to 40 infrastructure shares to ensure investors are not overly correlated to any single company, industry-specific or macroeconomic risk. It deploys the open-ended fund structure, which simply means the price at which units trade on the ASX, tends to mirror the underlying net tangible asset value (NTA) very closely.

The COVID-19 crisis has clearly been a tough time for the fund's portfolio of global infrastructure assets, which include Atmos Energy Corp, Red Electrica Corp SA, Crown Castle International Corp, and Transurban Group (ASX: TCL).

Given that this share is a long-term play, I believe it looks well positioned to benefit from the return to normalcy as the threat of the coronavirus dissipates, with the eventual news of one or more proven vaccines likely to provide a massive kicker.

The fund has a market cap of around $626 million at the time of writing, and typically pays a dividend of around 3%.

The primary objective of Magellan Infrastructure is to achieve attractive risk-adjusted returns over the medium to long-term, while reducing the risk of permanent capital loss. By hedging the bulk of its foreign currency exposure, Magellan Infrastructure is also relatively well protected from adverse currency movements.

While the Magellan Infrastructure share price sits slightly below its NTA of $2.81 (at $2.80 at the time of writing), it's currently trading at an 18% discount to its 21 February high of $3.44. Three years from now, I expect the current share price will have proven to be an attractive entry point.

MCP Master Income Trust (ASX: MXT)

Listed in October 2017 as a fixed-interest credit fund, the MCP Master Income Trust provides investors with direct exposure to the Australian corporate loan market. Having been the exclusive domain of regulated banks, fixed interest credit has largely been off-limits to mum-and-dad investors.

Given that the trust's units have traded with little correlation to public domestic and international equity and bond markets, I think the trust gives investors the means to diversify their portfolios in a way that hasn't been readily available before.

The Trust aims to provide investors with monthly cash income, low risk of capital loss and portfolio diversification by actively managing diversified loan portfolios.

Like other listed credit funds, the MCP Master Income Trust was a major casualty of the COVID-19 market sell-down. The trust's share price swan-dived by over a third from $2.00 on 6 March to a low of $1.26 on 23 March, amid fears of a collapsing oil price and a flailing property market.

It has progressively regained most of that ground, courtesy of improving investor sentiment and a fall in credit spreads – in part due to the propping up done by central banks (notably the Reserve Bank of Australia, and the US Federal Reserve) – and is currently trading a little under its $2.00 NTA at around $1.90.

In my opinion, the underlying strength in MXT's share price reflects its ability to consistently deliver cash income for its investors. The trust returned 5.55% per annum over the twelve months including December 2019, and 5.45% per annum since listing in October 2017.

The share has a market cap of $1.2 billion, which puts it just outside the S&P/ASX 200 Index (ASX: XJO), and it pays a respectable dividend yield of 6.1%.

The post 2 ASX shares to buy as alternatives to the pitiful returns from a term deposit appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Magellan Infrastructure Fund. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Believe it or not, there are a handful of shares that you can still buy today on the ASX that are exempt from tax when you finally sell them. I'm talking about ASX-listed pooled development fund (PDF) companies, which, despite their attractiveness, still tend to fly under the radar of most investors.

First, the history lesson: the PDF program was launched by the Paul Keating government in 1992 to help increase the supply of capital to small and medium-sized (SMEs) enterprises, based on certain criteria. A PDF raises capital and makes equity investments in SMEs and under the program, pooled development funds were offered generous tax concessions. While the PDF program has been closed to new registrations since 2007, existing registered funds continue to operate, and as such continue to have PDF status for tax purposes.

What are the tax breaks?

Buy one or more of these ASX PDF shares, and you'll receive a double-whammy in tax benefits.

Firstly, companies with PDF status are taxed at 15% on their income and capital gains received from their investments. By comparison, the full company tax rate sits at 30% and the lower company tax rate is 27.5%.

Secondly (and more importantly), as a shareholder in an ASX-listed PDF, you're exempt from the capital gains tax after selling. Assuming you're an Australian resident, you'll also receive franked and unfranked dividends that are also exempt from tax. There's also the option to use the imputation credits attached to the franked dividends to offset other tax obligations.

However, the benefit doesn't come without a potential downside, which is that you're not entitled to deductions or capital loss on the sale of these shares.

PDFs trading on the ASX

If you like the idea of investing in Australian SMEs, while also locking in some future tax breaks, here's a closer look at the 6 PDF shares trading on the ASX.

Authorised Investment Fund (ASX: AIY)

AIY invests in innovative SMEs within high-growth industries that capture the multiples of future consumer spending. For example, it has a 30% stake in Aenea Cosmetics, which offers customers a full range of epigenetic skin care products, and a 30% stake in global media representation company Asian Integrated Media.

AIY also owns a stake in NSX-listed company, Endless Solar, which has exposure to the renewable energy market.

While the company is currently suspended from trading pending its responses to an ASX enquiry, at 3 cents per share the last trade is undervalued relative to Morningstar's fair valuation of 4 cents.

MEC Resources (ASX: MMR) 

This exploration company offers investors the opportunity to secure equity in companies exploring for large energy and mineral discoveries like oil, uranium, nickel, iron ore and gold. Its primary focus is on companies with the potential to yield significant returns by advancing their discoveries into production.

The company has called for a voluntary suspension of trading until 17 July pending a meeting of shareholders to effect an in-specie distribution of the Advent Energy shares that it holds. At 0.4 cents the stock is currently trading a discount to Morningstar's fair value of 1 cent per share.

Strategic Elements Ltd (ASX: SOR)

Strategic Elements is advancing its in-house developed 'printable nanocube memory ink', which hopes to revolutionise the ability to print onto multiple surfaces, while remaining flexible and transparent. Its chosen tech field targets the global multi-billion dollar printed electronics market for use in advanced computing applications and improving data storage capabilities.

The company is also working with the University of New South Wales and has attracted 2 other significant development partners – CSIRO and VTT Finland – both world leaders in their prospective fields. Strategic Elements is also involved in a collaborative working group called PrintoCent, which includes large global companies in printed electronics, such as Nokia, Merck and BASF.

Its subsidiary Stealth Technologies is developing technologies to help vehicles to drive autonomously, and do physical tasks with robotics.

BTC Health Ltd (ASX: BTC)

This Australian specialty biopharmaceutical company provides partnering, product development and commercialisation capabilities to partners across the Asia-Pacific. It's dedicated to assisting these partners through the final stages of product development, regulatory submissions, reimbursement, distribution and post-marketing compliance and is actively seeking new investment opportunities in the biotechnology life-science sectors.

Demand for BTC's specialty health products reduced significantly following the cancellation of category two and three elective surgeries by the Australian Government on 25 March. As a result, the share price was heavily sold-off in February, and at 9.5 cents per share, it remains significantly undervalued relative to Morningstar's fair value of 13 cents.

I expect the full resumption of elective surgery to be reflected in the share price – sooner or later.

Generation Development Group Ltd (ASX: GDG)

Formerly known as Austock Group, Generation Development Group is a specialist provider of investment bond product solutions. The group established Australia's first flexible investment bond product over 15 years ago.  

Generation Development Group also operates Austock Financial Services, which provides administrative services, including unit pricing, fund valuation, investment and fund accounting, fund administration and business registry services.

The stock currently trades for 76 cents, slightly higher than Morningstar's fair valuation of 66 cents.

Acrux Limited (ASX: ACR)

Acrux listed in 2004 as a biotech share dedicated to developing and commercialising topical pharmaceuticals. Its early claim to fame was as the provider of roll-on testosterone, but its fortunes deteriorated when the US Food and Drug Administration (FDA) linked testosterone drugs to heart failure and strokes.

Since then, Acrux has focused on developing a pipeline of 10 topical generic drugs, and currently has 3 pharmaceutical products approved and marketed. The Acrux share price surged by as much as 62.96% in late May 2020, following revelations it has entered into an exclusive sales, marketing and distribution agreement with US-based private company TruPharma.

What I think is appealing is TruPharma's proven track-record of building niche product portfolios and getting difficult products FDA-approved and into the market. Subject to approval by the FDA, TruPharma will be responsible for the commercialisation of 6 existing products from the Acrux pipeline.

The post Buy these ASX shares today and pay no CGT when you sell appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

In April alone, ASX companies raised a whopping $8.9 billion, which, to put in context, was close to that raised in the US, a market which is 28 times bigger.

Fast forward 3 months and many of the funds raised to help ride out the worst of the COVID-19 storm have morphed into sizeable war chests with which to hunt for attractively priced assets.

Here are 3 ASX shares to watch in this space. All 3 went to market to raise capital earlier this year and are sufficiently cashed-up to start picking off some mouth-watering acquisitions at discounted prices.

National Australia Bank Ltd. (ASX: NAB)

Responsible for the largest capital raising back in April, NAB managed to raise $3.5 billion from predominantly institutional investors and is expected to use it to acquire quality assets. While NAB is no stranger to acquisitions, in my view it has made some horrendously bad ones over the past 35 years, including the biggest doozy of them all, the fated Clydesdale Bank in the UK.

With those blunders etched into the annals of Australia's corporate history, NAB's future growth-by-acquisition strategy is a much more calculated and local affair.

The bank has worked hard to throw off its former moniker as Australia's most accident-prone bank, and an eventual sale of its wealth unit, MLC will help to shore up its balance sheet even more. I expect future acquisitions by NAB to further consolidate its position as the more business-focused of the big four major banks.

Webjet Limited (ASX: WEB)

Having been hit hard by the COVID-led shutdowns, the travel group raised $231 million in an April placement at a 55% discount to its closing share price. Then earlier this month it started raising €100 million via a convertible note.

While the first rising was very much about shoring up the balance to get the company though a bleak 2021, capital raising number 2 is all about engaging in acquisitions. Following the second raising, Webjet CEO John Guscic was quick to reassure the market that the net effect is not designed to 'screw over shareholders', at the betterment of institutional investors.

He's also on record as signalling that post-COVID-19 presents some eye-opening buying opportunities. While Guscic has not flagged any specific potential acquisitions to the market, I think the potential to pick off quality assets at discounted prices bodes well for shareholders.

After some heavy cost cutting in April, Webjet's cash burn is currently running at around $15 million a month. As of 31 May it had liquidity of $307 million, including $215 million in cash. Given the nature of Webjet's former acquisitions, I suspect it will start to deploy its firepower to do more M&A deals with offshore counterparts, particularly in Asia. Reporting season may see the online travel group disclose more detail here, so pay close attention to the commentary that supports the numbers.

Telstra Corporation Ltd (ASX: TLS)

After shoring up €500 million in a (bond issue) borrowing spree, and assuring a further $940 million in bank facilities since mid-March, Australia's biggest telco's committed bank facilities stand at a total of $3.6 billion. Telstra made some tough decisions during the coronavirus pandemic, including massive layoffs and stand-downs, but appears to have emerged a leaner and much more robust version of itself.

The company also seized the opportunity to bring forward $500 million worth of capex from the 2H FY21 into CY 2020. It also has plans to deploy a similar amount to increase the capacity in its network. This is likely to include a further acceleration of its 5G rollout.

To its credit, Telstra had placed its current outlook within the range of its FY20 guidance, which will be looked at favourably by the market. Despite having slipped into what could have been takeover territory when the price slumped to around $2.60 late June 2018, the telco now looks a lot more like an acquirer going forward.

Success with previous acquisitions has seen Telstra consolidate a string of companies – including VMTech, MSC, Readify, and Kloud – into a single brand dubbed Telstra Purple, which is now Australia's largest technology services business.

While much of Telstra's focus is on its dominant position in the 5G space, one area that I think is ripe for future investment is its Telstra Ventures division. This is the telco's high growth venture capital portfolio of investments, which has actively invested in a broad range of leading technology businesses. These include digital storage options DocuSign and Box, a holding in Snapchat and a particular focus on cyber security via AttackIQ.

The post 3 large cap ASX shares primed for expansion and M&A activity appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Reporting season is always awaited with anticipation of good news, but the losses witnessed on the ASX this year have already primed the market to expect the worst earnings numbers since 2011–2012. Given that consensus forecasts project a 15%–20% decline in company earnings for FY20, the sea of red during this reporting season shouldn't come as a rude shock.

While it will be good to get the full brunt of the COVID-19 hit to corporate earnings out on the table, the trickier part for investors will be making sense of earnings forecasts for FY21 – which Morgan Stanley expects to improve to a drop of 2.7%.

Adding to the forecasting conundrum is the unknown impact from any extension to JobKeeper and/or the fallout from the federal government's budget night announcements in October.

Due to the continuous disclosure rules for listed companies, shareholders should be in a 'no-surprise' situation when companies finally report. However, some companies may feel it's prudent to feed the market with any updates – especially on any major earnings adjustments – before their results are released.

Here are 3 ASX shares that may be among those likely to deliver a surprise in terms of either earnings, outlook guidance or capital management at or before reporting season.

FlexiGroup Limited (ASX: FXL)

With the FlexiGroup share price down around 35% since the start of the year, despite improving fundamentals, it's clear in my opinion that this point-of-sale finance provider has been left oversold in the wake of COVID-19. I expect the commentary at full year to provide greater insight into FlexiGroup's digital offering – mainly under the Humm brand – and how that has helped to add new customers to its platform.

Much of the company's recent trans-Tasman customer growth – now 2.1 million – can be attributed to its diverse business model, which includes buy now, pay later (BNPL), credit cards and SME lending. Equally encouraging is the 'stickiness' of its customer base, with those using one of its payment products doing so on average 9 times a year.

While the FlexiGroup share price soared 12% following its recent market update, which included revelations its customer base exceed 2 million, it has not enjoyed the same manic party experienced by its all-star peers Afterpay, Zip, and Splitit.

I'm expecting the full result to include supporting commentary around the company's recent turnaround. This should help to woo those investors who still view the stock under its former guise as a struggling consumer lender.

In my opinion, those who buy at current levels, and before the full year announcement, should not be disappointed 12 months from now.

Sydney Airport Holdings Pty Ltd (ASX: SYD)

Despite being one of the hardest hit by the shutdown in domestic and international travel due to COVID-19, I think investors in the airport will be rewarded for staying the course over the longer haul. I believe the stock is well capitalised to weather a more protracted recovery.

I expect the market to reward any sliver of blue sky announced during reporting season by pushing the Sydney Airport share price – currently down around 40% on its February high of $9.04 – higher. The airport will also benefit from a recalibration of the COVID-19 crisis, which is now less about eradication, and more about containment.

Total passenger numbers were down 97.4% in May and will remain similarly low until government travel restrictions are eased.

While domestic and international passenger numbers aren't expected to return to pre-COVID levels until 2023 and 2024, respectively, it's important recognise the near-monopoly status of this infrastructure asset, and how that underscores its core earnings. I suspect, that within short-order, analysts will recognise the futility of benchmarking Sydney Airport by its pre-COVID highs.

I'm of the belief that if you enter this stock for a long-term play, at current levels, you won't look back in anger. Watch out for any announcements during reporting season of new lease agreements with luxury brands, plus further updates on its hard infrastructure investments, and updates on its covenant position.

Centuria Industrial Reit (ASX: CIP)

Australia's largest domestic pure-play industrial REIT, Centuria Industrial has arguably crawled out from under the COVID-19 mockers with one of the finest set of numbers. Centuria has pre-empted reporting season with an announced uptick in the value of its portfolio by an estimated 1.3%, or $21 million.

Much of the strong showing in its industrial property comes from the defensive nature of its industrial occupiers, with ongoing demand from e-retailing, online grocery shopping and packaging requirements providing an added kicker.

But these are preliminary revaluations, and I'm assuming there's more good news in store the will accompany its full year announcement. I'm going to watch the full year announcement for further insights into how industrial property appears set to ride the post-COVID online sales boom.

Based on this upside and the numbers that Centuria has already reported to the market, I can't see any real justification for the 15% discount the stock is trading at relative to its mid-February high of $3.79.

The post Why Sydney Airport and 2 other ASX shares could surprise this reporting season appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story owns shares of Sydney Airport Holdings Pty Ltd. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Given the underlying weakness in the Chinese economy – including a soft export market, low domestic demand and lingering trade wars – it's easy to see why investors would be wary of this market. However, when compared with the bleak economic outlook globally – which will hamper recovery in corporate earnings – some exposure to China looks justified, in my opinion.

It is the only global economy that's expected to be in positive territory this year.

With full year growth expected to come in at 1.8%, the country appears to have has miraculously dodged a technical recession, and some economists, like BlackRock, expect the world's second largest economy to experience "near-trend growth" as soon as late 2020.

In addition to the return of strong export markets, what China's economic stimulus is now focused on is middle-class shoppers spending more as job stability returns to post-COVID-19 levels. China's reliance on consumer spending cannot be understated, with consumption contributing to two-thirds of the country's economic growth, according to recent figures.

Greater risk in not investing in China

Despite trade wars, geopolitical tensions and post-COVID-19 economic uncertainty, there are still ways to take measured bets on China. If you're prepared to do your homework, it's possible to get good exposure to China's recovery story. Despite the pandemic, some fund managers have already done this.

For example, back in March at the height of the pandemic, Magellan fund manager, Hamish Douglass increased his allocation to China from 14% a year ago to 25%, via exposure to just a handful stocks. While the fund manager used to be invested only in Apple, Starbucks and Yum Brands, it has now added LVMH, Estee Lauder, Alibaba and Tencent to its holdings in China.

Assuming the focus remains on quality companies, Douglass believes it's more risky not to invest in China over the next 20 years. He cited Starbucks as a great way to access the Chinese middle-class, where a new store was opening in China on average every 15 hours.

Then there's Zenith Investment Partners, which pre-COVID had already increased its average exposure to China from 18% to 22%. Zenith's exposure to what are referred to as A-shares – those listed on the Shanghai and Shenzhen stock exchanges – also doubled from 2% to 4%.

Despite being relatively out of favour, and underweight within (most) global portfolios, in my view Chinese equities look to have been oversold. This creates opportunities for those willing to take a long-term view.

Signs of a rebound are already evident, with recovery picking up steam in June on the back of the Chinese government's 'new style' infrastructure spending (like 5G) – plus other fiscal stimulus measures – designed to drive both domestic consumption and help reopen overseas markets.

Exposure to China through ASX ETFs

If you like the idea of having exposure to China, but don't have the stomach to be a stock-picker within this market, another way to play China's recovery story is through ASX-listed China exchange traded funds (ETFs).

Despite rallying 34% in the last year, my favoured ASX-listed China ETF is VanEck Vectors China New Economy (ASX: CNEW). The shares on this index seem to be in the sweet-spot of China's economic stimulus measures.

In an effort to help stabilise its domestic market, the People's Bank of China is committed to extending more credit to small businesses that had their liquidity stretched during the lockdown. Unlike the global financial crisis (GFC), this time around economic stimulus measures are primarily focused on technologies of the future, including everything from electric cars, industrial robotics, through to artificial intelligence (AI). As investor with exposure to China, this is something to be aware of.

CNEW seeks to provide investors with access to a portfolio of the most fundamentally sound companies, with the best growth prospects – in consumer discretionary, consumer staples, healthcare, and technology sectors – that are domiciled and listed in mainland China. The three biggest holdings within CNEW (which holds 120 shares) include Guangdong Biolight Meditech Co Ltd, Jiangsu Zitian Media Technology Co Ltd and G-bits Network Technology (Xiamen) Co Ltd A.

Other China-based ETFs listed on the ASX include VanEck Vectors China A-Share (ASX: CETF), which is up by 2.81% over the last 12 months, and Ishares China Large-Cap (ASX: IZZ), which is down 1.28% over the last 12 months.

ETFs aside, it's also important to note that any ongoing fiscal stimulus-driven upswing for China stocks also bodes well for fund managers whose exposure to China may have fallen along with the market last year. For example, ASX-listed Platinum Asset Management Ltd (ASX: PTM), which has around a 5th of its holdings in China, looks well positioned to benefit from China's new infrastructure stimulus measures. Since peaking at around $8.50 early February 2018, the Platinum share price is now trading at below half of that high, at $3.76 per share.

Then there are another 30 to 40 funds that could also benefit from their exposure to a Chinese recovery, including the Magellan Global Trust (ASX: MGG) and the Fidelity Asia Fund.

Exposure to China through ASX shares

While resource stocks aren't in the direct eye of China's current stimulus measures, some sub-sectors, like base metals (notably iron ore, which is currently selling for around US$100/tonne) are still a net beneficiary of the strong demand for steel. Fortescue Metals Group Limited (ASX: FMG) is the most dominant playmaker in this space in my opinion. Also adding to Fortescue's fortunes are the export downgrades by its biggest competitors Vale and Rio Tinto Limited (ASX: RIO).

China's plans to move from coal to gas-fired power, also presents enormous long-term opportunities for Australian providers. Despite a notable deterioration in trade relations, China became Australia's biggest market for LNG in April, accounting for 40% of total exports. Key beneficiaries include the Queensland-based Origin Energy Limited (ASX: ORG)'s Australia Pacific LNG Venture and the Woodside Petroleum Limited (ASX: WPL)-run North-West Shelf venture in WA.

Resource shares aside, with China's stimulus measures focused squarely on consumers, any improvement in confidence could also provide a kicker to ASX shares that export high-end consumer discretionary products such as meat, seafood, dairy, fruit, alcoholic beverages and pharmaceuticals. While a growing number of ASX shares export to China, those with the greatest China exposure include winemaker Treasury Wine Estates Ltd (ASX: TWE), milk and infant formula companies A2 Milk Company Ltd (ASX: A2M), and Synlait Milk Ltd (ASX: SM1) plus vitamins company Blackmores Limited (ASX: BKL).

Foolish takeaway

Given the tensions with China on myriad levels right now, it's important to pick shares with strong exposure to this market carefully. So do your homework – look for shares with 30% or more exposure to China, within markets that appear to be outside the turmoil of any ongoing trade tariff tension, and that will benefit from the 'translation effect' when foreign earnings are domiciled back into Australian dollars.

The post Here's how to play China's V-shaped growth story appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story owns VanEck Vectors China New Economy shares. The Motley Fool Australia owns shares of and has recommended Blackmores Limited and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

While there's no single 'right' way to buy ASX shares, buying when a share is trading at a discount to the sum total of its worth based on earnings, dividends, equity and debt – aka intrinsic value – means you are more likely to make money. That's because the price at which you enter a stock has a major bearing on your future returns.

But avoiding paying too much for ASX shares is easier said than done. As an investor, you don't have the resources to analyse companies across key criteria like growth, value, quality and timing. Even the fund managers and brokers invariably get it wrong. That explains why after 10 years, 85% of large cap funds underperformed the S&P 500, and after 15 years, nearly 92% are trailing the index.

The key to maximising future returns is to understand a handful of financial ratios, plus some other key indicators. Do this and you'll significantly improve your ability to buy the right shares at the right price.

First, the key financial ratios

No single piece of data should ever be looked at in isolation. The smarter approach is to draw from a handful of criteria to get a much better snapshot of a share's overall health. Firstly, let's take a look-see at the financials.

• Price-to-earnings growth (PEG) ratio: A combination of the price-to-earnings (PE), divided by the prospective earnings-per-share (EPS) growth rate gives the PEG ratio, which measures the price of earnings growth. Ideally you should be looking for a PEG of less than one. Tip: the lower the PEG ratio, the more a stock may be undervalued relative to its future earnings expectations.
• Price-to-earnings (P/E) ratio: Contrary to the popular belief of many investors, P/E is not a measure of absolute value. As such, it can often raise more questions than it answers. However, a share's P/E – which is its current share price divided by its earnings per share (EPS) – provides a useful starting point for comparing different shares within like or similar sectors. If you're set on using P/E as a measure, you need to understand: A) why it might be low, relative to its peers; and B) the outlook for the next 12 months. If you don't understand these 2 factors, you risk buying value traps, which will drag down your overall portfolio performance.
• Payout ratio: As a percentage of net profit paid out as dividends, the payout ratio is an important proxy into the sustainability of a company's dividend. It also provides strong clues into a company's future growth upside. A payout ratio less than 50% can also signal that the company plans to use surplus cash to grow the business.
• Return on equity (ROE): A key measure of how well management uses its equity, ROE is earnings (revenue minus expenses, taxes and depreciation) divided by equity. As long as debt remains controllable – ideally with a net-debt to equity ratio under 70% – there's no better indicator of business performance than the ROE. Another way to look at ROE is to ask whether or not every $1 used in financial growth is able to convert into $1 of market value.
• Return on investment capital (ROIC): ROIC measures the cash rate of return on the capital that a company has invested. In some cases, it's modified by replacing earnings with earnings plus the interest on long-term debt. In this case, a comparison with return on equity (ROE) determines whether the company benefitted from the extra debt. Assuming the return on equity (ROE) is higher than ROIC, the debt has succeeded in adding value to the business.
• Earnings per share (EPS) growth rate: Within normal markets, share prices typically increase if EPS increases. And the faster a company grows its EPS, the higher those earnings tend to be valued.

Next, the more qualitative measures

It's important to overlay the above key financial ratios with some important measures of growth and value. Digging around in the annual report can provide valuable insights into:

• Management's track record and industry knowledge. One key element to look for within managements' talents is evidence they've carved out a sustainable competitive advantage for the business. Without it, a company can't generate long-term, above-market returns.
• Sales activity: There's no smoke and mirrors here, either a company's revenue has tracked upwards over the long term or it hasn't. If not, why not, and more importantly, when did the rot set in?
• CAPEX, staff numbers and R&D: You want to see sufficient evidence that the company is investing in future growth – this includes its staff. If there is no evidence of sufficient investment, then why not, and equally important – when did the wheels start falling off?
• Structural growth: Unlike cyclical growth, which is vulnerable to the economic cycle, you want to find out how much structural growth is being driven by what's happening inside the business. A shift or change in the basic ways a company functions or operates can signal that it's serious about applying new technology or adopting to regulatory or industry-changing reforms.

A little homework returns in spades

Running a ruler over of any of the stocks you have on your radar – before you buy (or sell) – is tantamount to a health check. The good news is that using the 10 criteria above isn't rocket science; all of the data you're looking for is publicly available.

Instead of buying purely on share price momentum – which isn't investing, it's speculating – this checklist will ensure that at the very least, you're entering stocks with solid balance sheets and sustainable income streams, both of which are needed to support either consistent dividends and/or reinvestment in future growth.

The post 10 key things to consider to help you buy quality ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Despite being down 21.1% in the March quarter, some of the companies within the Deloitte Australian CleanTech Index – which comprises 92 ASX cleantech shares across 5 sub-sectors – now look primed to rebound from the pandemic-induced disruption.

Here are 3 ASX cleantech large-cap shares that have been regaining lost ground since the share market sell-off in late February.

Reece Ltd (ASX: REH)

The share price of this plumbing and bathroom product supplier across Australia, NZ and the US dropped from a high of $11.90 on 21 February to a 23 March low of $7.87. The Reece share price has since bounced back up to $9.10.

Given the fundamentals on this stock have not changed, I believe it's well placed to benefit from both measures to reignite the Australian economy, including the federal government's $688 million HomeBuilder/renovation scheme, and future growth in its recently acquired US plumbing distribution business, Morsco Inc.

As a vote of confidence in the stock, Reece recently tapped the market in a $600 million capital raise, plus an attractively priced retail entitlement offer, which will increase liquidity, reduce net debt and help capitalise on new opportunities, which may include further acquisitions in the US. The company indicated the measures would increase its total liquidity position to $917 million.

While it's unlikely, the $917 million Reece now has available could be drawn on if future outbreaks of coronavirus forces shutdowns of its Australian and US outlets, which (unlike NZ) have managed to stay open given their classification as essential services. These funds also position Reece to ride out any entrenched downturn locally, or if the US downturn ends up being a more protracted affair.

I think the stock's clear market dominance remains a major plus going forward, with future upside coming from further expansion into the US, and ongoing technology investment. The stock trades on a forward price-to-earnings (P/E) ratio of 25x. In my opinion, a share price sub-$9.25 makes for a reasonable entry point for long-term investors.

Cleanaway Waste Management Ltd (ASX: CWY)

As a provider of waste management services, Cleanaway has performed well throughout the coronavirus crisis. Due to Cleanaway's defensive core earnings stream, the share price (which is currently 13% down on its 52-week high of $2.53) managed to avoid the brunt of the sell-off experienced by the market at large.

With municipal waste management representing up to 55% of total earnings before interest, tax, depreciation and amortisation (EBITDA), Cleanaway looks well placed to handle its debt position, in my view. I think the stock looks equally well placed to capitalise on Australia's desire to become increasingly waste self-sufficient.

With its Footprint 2025 strategy seeing the company investing in a sustainable value chain, Cleanaway also appears to be well positioned to make further forays into recycling and alternative waste processing. I think this will help to consolidate the company's market dominance and this bodes well for improved margin growth. In my opinion, a share price of under $2.00 would make for a buying opportunity.

Bingo Industries Ltd (ASX: BIN)

Like Cleanaway, Bingo's strong fundamentals in recycling and waste management solutions positioned it well to ride out the worst of the COVID-19 downturn and emerge remarkably unscathed. Bingo shares were heavily sold-off along with the broader market, going from a high of $3.20 on 19 February to a low of $1.82 virtually a month later. However, it has since bounced to $2.19, which puts it on a 10% discount to Morningstar's fair value of $2.45.

I'm particularly impressed by Bingo's financial performance in Q3 FY20, which (unlike so many shares) is on track to deliver its stated market guidance, pre-COVID-19. Bingo's cash preservation focus and strong balance sheet means it's well positioned to capitalise on the closure of any of its smaller unlisted competitors, which may have limited access to the capital needed to successfully weather the pandemic.

In addition, the recent approval to increase its total landfill limit from 700,000 tonnes to 1 million tonnes annually allows it to increase its operating hours, which signals a major revenue opportunity for Bingo going forward.

The post 3 ASX cleantech shares to consider buying now appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The upcoming reporting season will be unlike any other in the history of the ASX. During the 8-week biannual 'look-see' that begins in July, the full extent of the coronavirus-led down-turn will be revealed. 

It's important to not only pay attention to the financial results, but also look beyond the aberration within these distorted numbers to the underlying commentary supporting it. While a handful of shares within certain sectors like healthcare, technology and some retail will present pretty healthy numbers, the bulk of ASX-listed businesses are destined to report a deep sea of red.

The numbers – and outlook – that surface at reporting season can have a significant impact on the long-term value of the shares you own. While you need to know what to look out for at the best of times, in this post-COVID-19 world the stakes for correctly interpreting the tea leaves behind the numbers are higher than ever.

Don't take headline numbers at face value

It's important to understand that Australian accounting standards – which differ somewhat from generally accepted accounting principles (GAAP) – afford ASX-listed companies significant wriggle-room with which to weave their magic within their figures.  

Be very aware that the headline figures a company releases when in reports are the numbers that paint the best possible picture of the company's performance. These numbers are also often the ones that most mainstream media will regurgitate.

While some companies treat stakeholders with a high level of transparency, others will try to bury some of the more meaningful numbers that perhaps don't paint such a rosy picture. That's not to suggest they're doing anything illegal, it's just that there are no real laws or requirements about how a company must structure their announcements, meaning those more important figures can sometimes find themselves pushed further out of sight.

For example, while earnings before interest and tax (EBIT) is often quoted, many businesses will present their 'underlying EBIT', which often strip out charges deemed 'non-operating'. It's also not uncommon for companies to move line items within their cash flow statement. Again, this is something that is completely within the accounting rules – nothing illegal. Companies can, for example, shift interest expenses from 'cash flow from operations' (CFO) to 'financing cash flow'. The net effect is that this transition could make CFO look decidedly better by comparison.

Another trick that companies use to make a balance sheet look more respectable is off-balance-sheet leverage of minority shareholdings in associate companies. So for example, by only owning 49.9% of a business (and not having 'control' of that business), which may carry a lot of debt, companies aren't obliged to include it on their balance sheet. This means a lot of leverage can be disguised within its consolidated reporting.

Tell-tale signs something's out of whack

If there's a sizeable difference between operating earnings (e.g. EBIT) and net profit after tax (NPAT), it may be necessary to find out what it is and why. 

In light of the coronavirus-led downturn, which for some companies became a liquidity crisis, this may be a much more acute issue within the upcoming reporting season. With many companies struggling to find the liquidity needed to meet day-to-day requirements, it's important not to overlook their outstanding short- and long-term debt.

When it comes to debt covenants, try to gain a better understanding of the company's requirements (e.g. how much cash it must hold, or the earnings it must generate to ensure it does not breach those covenants) and when its debts will come due. The company's upcoming reports may shed some light on these factors and allow you to gain a better appreciation for how your shares might fare. For example, how will the business cope when any temporary covenant relief offered by the banks is lifted, or if liquidity doesn't return in the near future. Will it be able to repay its debts, or is there a growing risk that it will not? 

Remember, if a company appears to be paying out more than it's earning, it may be living on borrowed time. If the sky does fall in on these shares, remember a debt-holder and even hybrids have priority over you as a shareholder when it comes to claiming assets. 

I find that one of the best ways to get a quick fix on the quality of a company's balance sheet – and other financial statements – is to check out key performance measures. These include debt levels, cash flow ratio, net-debt to equity, earnings per share, return on equity growth, and the strength of its cash flow relative to reported profits.

Tips to help separate the numbers from the spruiking

Here are 10 ways to ensure you really get to the bottom of a company's results.

1. Have an idea of what you're expecting from a company before it reports. That way you'll be in a much better position to determine the strength of the results. 
2. Read the financial statement before the supporting commentary. If there's no mention within the commentary of certain key numbers, that may be worth looking into further. 
3. Compare how a company presented its report in years past. If it has excluded numbers that it previously reported, that may be a yellow flag. 
4. Examine how well cash has been flowing through the business, and check to see whether profits and cash flow broadly align. 
5. Check to see if a company has a 'funding gap', due to insufficient cash, which is forcing it to take on debt or raise capital.
6. Check whether the type of business and its level of expenditure complement the way it chooses to report. Given that profit is an accounting number, you need to understand what's excluded from underlying earnings. For example, a P/E valuation is more meaningfully applied to companies with an established history of consistent earnings than one that chooses to exclude many 'one-off' costs from its profit and loss statement.
7. Find out what management is doing for the long term good of the business. In other words, what are its plans for taking the business forward?
8. Does the company have a history of poor disclosure and why? Be on the lookout for companies that perennially need to satisfy a 'please-explain' to shareholders. 
9. Look for clues as to how management is responding to its problems. 
10. Check for guidance on dividend policy and pay-out ratios. Take a close look at the balance sheet and the quality of a company's cash flow to decipher whether a dividend looks sustainable. 

While we believe there are still good buying opportunities in this environment, it is vital to separate the weeds from the flowers. Identify businesses that are capable of flexing their muscles, rather than those simply telling shareholders they have muscles without any evidence to back it up.

The post What to look for when companies report their post COVID-19 results appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

With ASX shares now getting a grip on their earnings following the recent crash that left most of them oversold, it's time to take stock of what the current 'recalibration' means for the overall market. The end of the financial year is looming large, and with the S&P/ASX 200 Index (ASX: XJO) up around 35% since falling to 4,546 points on 23 March, there's no better time to review the ASX shares in your portfolio.

Cutting your losses on non-performing shares is never easy. What makes it doubly hard is broker aversion to the S-word, with their recommendations typically gyrating between 'buy', 'hold', and 'accumulate'.

But sometimes it simply pays to bite the bullet and take a loss. This, incidentally, can have some favourable tax considerations: notably the ability to offset losses against future gains. On the flipside, an attempt to avoid paying tax on a capital gain is insufficient reason not to sell a stock when you should.

Take gains off the table while you can

But it's not only the rotten apples that you should consider selling down. Sometimes it's equally important to know when to lock in some profit. That doesn't necessarily mean existing a quality stock completely.

For example, many shares have seen major gains recently. One strategy for shareholders could have been to reduce their stake, and potentially buy back in following a share market correction, or via corporate activity. Due to a slew of recent capital raisings, some shareholders have been able to offload shares only to top up their holding at attractive discounts to the current price.

Admittedly, there's nothing wrong with letting your profits run, especially if future upside is yet to be factored into the price. However, savvy investors know when to take profits before prices potentially fall.

The art of selling shares is also considerably less predictable than buying, so it pays to have a solid strategy.

Do your reasons for selling stack up?

Shares that have enjoyed a strong run up may start to look decidedly overheated. This often triggers smart investors to sell out at a price they perceive to be close to the top. While calling the top (or bottom) is something even most professional investors struggle with, one tell-tale sign that the price is looking decidedly 'toppy' is how far it rallies above any reasonable estimate of value.

One of the investment truisms coined by Warren Buffett is that the share price cannot continue to outperform the underlying business forever. At some point, something has to give. Unless there are future upsides to current valuations, the closer a company's share price gets to its intrinsic value, the greater the potential risk of holding onto the stock.

So when the share price runs way ahead of value and for no justifiable reason, don't get too greedy and don't simply rely on raw exuberance or momentum. Equally important, remember that it's over the short-term that the gap between the share price and the underlying performance of the business will be at its widest.

If you're unsure of where a share price is heading, ask yourself this: If a stock trades at $10 today, while the intrinsic value is $20, do you expect the price to rise to $25 next year, and maybe $35 three years later? Can you afford to wait? If the answer's yes – consider holding. If not – consider selling.

While it's not rocket science, the conclusion you come to should be based on research into future valuations, rather than an educated hunch.

Take the money and run

You may also think about selling-down stocks that are starting to slip into what's known as value-trap territory. Typical candidates include former share market darlings. While their best days might be behind them, these ASX shares can still attract investors due to their sheer size, dividend history or an instantly recognisable household brand.

Remember, shares that appear to be under-priced have typically become that way for good reason. For example, bad management, declining business performance, declining competitive edge (due to regulatory or technological change), excessive debt, an over-priced acquisition, or an unaffordable dividend payout ratio.

These factors will result in declining intrinsic valuations and future growth that's less promising. This will eventually find its way to the share price. Unless you sell these stocks, they will continue to drag down the value of your overall portfolio.

The trick is to take these suppurating time-bombs – which, I'm sorry to tell you, are destined to be liquidated, enter receivership or administration – out of your portfolio before they do greater damage. Before they do, why not deploy what value is left in these lame shares into the market's next best opportunities.

The post Is 'sell' really a dirty word? How to know when to let go of your ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Of course, this may never eventuate. All the early signals suggest that the recovery we're on looks much better than anyone expected. However, it's never a bad idea to add some good defensive shares to your portfolio. These shares are more likely to hold up when others are falling. Given that investors are currently looking at the market through rose coloured glasses, bringing some contrarian thinking to the basket of shares you hold could have a lot merit.

When looking for defensive shares, it's important to look for companies that have low debt on balance sheet, sustainable and high quality underlying core earnings, quality management, and sufficient cash to seize growth opportunities. It's also preferable that they aren't in a sector at the apex of rapid technology and/or regulatory upheaval.

While these shares are often slow-burners in terms of strong growth, they typically have the capacity to retain their core earnings when the markets are in flux – like now.

Here are 3 ASX shares to consider.

Hansen Technologies Limited (ASX: HSN)

While this technology mid-cap doesn't have the strong organic growth of local peers, like TechnologyOne Ltd (ASX: TNE), Whispir Ltd (ASX: WSP), and Appen Ltd (ASX: APX), the quality of its underlying earnings can't be understated.

Two thirds of the company's revenue is from recurring software fees. While not dynamic, this revenue is at the very least relatively bankable, regardless of what the economy is doing. The stock also earns kudos for doing what few companies are prepared to do right now – provide earnings guidance. Given the state of the economy, its full year guidance of operating of revenue between $298 million and $300 million – slightly lower than the original $300 million to $305 million – is encouraging.

What I also like about the company is its management's track-record in growth by acquisition. With a net debt to equity ratio of around 59%, the business looks well positioned to afford future acquisitions. At $3.08, Hansen shares are trading at a 23% discount to Bloomberg's 12-month price target of $4.02.

Spark Infrastructure Group (ASX: SKI)

As a leading electric utilities business with $18 billion of total electricity network assets, Spark's core earnings have a high degree of resilience about them. Much of that resilience was reflected in the company's Macquarie Investor Conference Presentation in early May. Spark reconfirmed its FY2020 distribution guidance of at least 13.5 cents per share.

Despite cost increases linked with summer bushfires and tree management, the latest financial result saw earnings before interest, tax, depreciation and amortisation up at each of its largest business units – CitiPower and Powercor in Victoria and SA Power Networks in South Australia. The result was buoyed by rising regulated tariffs and higher services revenue. Then there are the returns at electricity transmission network TransGrid, of which Spark owns 15%.

Government tariff adjustments on electricity prices tend to move in tandem with economic activity – and hence key indicators like the 10-year bond yield. A return to more normal bond yields beyond fiscal 2021, which hit record lows mid-2019, should improve Spark's returns and distributions over the longer haul.

While the Spark share price has bounced from a low of $1.72 mid-March to $2.15, it still trades at 6% discount to Goldman Sachs' target price of $2.30.

ASX Ltd (ASX: ASX)

ASX's standout defensive features come from its near-monopoly status as operator of Australia's primary market for the listing and trading of securities. Equally compelling is the quality of its balance sheet, and notably its debt-free position, and strong cash balance.

To its credit, the company was quick to warn the market of a significant decline in cost growth for FY20 (below guidance of 6–8%) due to COVID-19. While projections within the current market are problematic, the company expects net interest earned on collateral balances – which accounts for around 90% of total net interest income – to remain elevated in the near term.

Given the company's dominant market position, history of cost containment, and ability to deliver consistently good EBIT margin, it looks better positioned than the market at large to weather near-term market volatility. This bodes well for a sustainable dividend payout ratio of around 90%.

In my opinion it's worth watching the ASX Ltd share price for dips following future market corrections, with sub-$70 making for a more comfortable buying position than its current price of $88.57.

The post 3 defensive ASX shares for a potential September sell-off appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the shares mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Hansen Technologies. The Motley Fool Australia has recommended Hansen Technologies. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

You need to tread carefully when using a price-to-earnings ratio (P/E) and dividend yield to gauge how attractive ASX bank shares might be. That's because bad debts or one-off items can compromise the sustainability of bank dividends, as shareholders discovered in 2007 when they were slashed to help prop up badly needed bank capital.

It's also important to understand that banks require some peculiar evaluation criteria when it comes to assessing their intrinsic value and business performance. If you do want to use the P/E ratio to help value and compare one bank share against another, then it must be used alongside some bank-specific financial ratios.

While some valuation principles are equally applicable to all companies, there are a number of complications specific to banks. These include determining leverage – due to being both borrower and lender – regulatory impact, capital expenditure and interest margins.

Key ratios

Net interest margin (NIM): A bank's primary income source is the difference between the interest income from its loan book, and interest paid out to depositors. Typically expressed as a percentage of the average loans outstanding over the period under review, this is known as the 'net interest margin' (NIM). A high ratio indicates bank efficiency. While you won't find it in official financial statements, most banks disclose this average somewhere near the front of their detailed annual reports.

Cost to income ratio: Measures a bank's operating expenses as a percentage of its total income. The lower the ratio, the better the bank is at controlling costs and most brokers prefer banks with a cost to income ratio of less than 50%.

Bad debts ratio: Measures a bank's provisioning for when a client can't meet their repayments and a debt goes bad. The higher the number of bad loans, the higher you really want the net interest margin to be, otherwise it could wipe out a hefty chunk of profit.

Return on assets: As a useful efficiency measure for banks, ROA indicates how profitable a bank is relative to its total assets. Calculated by dividing annual earnings by its total assets, ROA is displayed as a percentage – the higher the better – and should reveal how competent management is at using its assets, like mortgages to generate earnings.

Tier 1 capital ratio: Is a litmus test of a bank's capital strength. It's arrived at by isolating the amount of 'tier 1 capital' – the highest quality capital – then identifying the proportion of 'risk-weighted assets'. Capital ratios in the big four and Macquarie range between 10.8% and 12.2%.

Price to book ratio: Is the value you would see if the business was liquidated and liabilities paid out. A ratio of 1 indicates shareholders can only expect a return of book value. A ratio above 1 indicates the extent to which shareholders are potentially exposed to market risk.

Standout ASX bank shares to buy now

Based on its forecasted pre-provision operating profit per share growth over the next 3 years, Goldman Sachs' preferred major bank exposure is National Australia Bank Ltd (ASX: NAB). It expects NAB's revenue momentum to remain superior to its peers, driven by its overweight exposure to SME lending. While NAB has taken the lowest provision for bad debts, at 0.38%, its credit impairment charge as a percentage of loans is also considerably lower than its peers.

At a share price of $17.95, the bank is still trading 40% down on its 52-week high of $30.00. Goldman Sachs also reiterates a buy on Australia and New Zealand GrpLtd (ASX: ANZ) shares, which at $18.05 are still trading 38% down on their 52-week high of A$29.30.

Based on its strong deposit franchise, Commonwealth Bank of Australia (ASX: CBA) is seen as more vulnerable to the medium-term impact of lower rates. The bank also has the highest exposure to more competitive mortgages relative to its peers. Based on a valuation that's more expensive in relative and absolute terms, Goldman Sachs concludes that NAB and ANZ offer a more attractive entry point at current levels.

Similarly, while Westpac Banking Corp (ASX: WBC) has demonstrated better expense control, stronger margins, and better than expected housing growth, the stock is not regarded as a buy. This is due to risk of higher investment spend, plus the risk of elevated fines and asset quality deterioration. At $17.36, Westpac shares are trading at a 42% discount to its 52-week high of $30.05.

Market uncertainty over banks' fortunes is reflected in buy, hold and sell consensus broker recommendations on ANZ, NAB and Westpac. However, brokers unanimously agree that Commonwealth Bank is not a buy, with 12 out of 15 seeing it as a strong sell.

Despite the recent rally, bank share prices still suffer from a negative sentiment overhang that pre-dates COVID-19. Yet if the GFC is any proxy, the post-crisis period bodes well for the sector.

The post How to value the big four ASX banks appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

But the Australian Prudential Regulation Authority (APRA) has brought some sobriety to the bank rally. In a speech to international bankers last Wednesday, APRA Chair Wayne Byres warned that it's "dangerously naive" to assume bank shares will continue on an upward trajectory – given that an economic snap-back is unlikely, and that the real troubles for the financial sector remain ahead.

The banks account for 20% of the S&P/ASX 200 Index (ASX: XJO)'s market value, and have historically delivered both massive profits and generous dividends, which has made them surrogates for fixed income. They have consistently offered investors what the vast majority of listed stocks can't: growth and income.

However, the great virus crisis (GVC) of 2020 has only added to a litany of issues that have been plaguing the big four for a while. These include the requirement to hold significantly more capital than ever before, plus a tsunami of additional regulatory risks.

Are bank dividends still a suitable surrogate for fixed income?

The net effect of the issues above is that the mouth-watering dividends investors could previously bank on now look decidedly less certain. The market is now rightfully questioning whether Australia's multi-decade obsession with the big four banks is still warranted if their dividend levels are unsustainable.

For income investors who have treated bank dividends like annuities, this is a tough question to ask, especially with cash and bank deposits offering miserable returns.

Unlike the global financial crisis (GFC), the banking sector, and especially the big four, will not emerge from the GVC as unscathed. Federal government pressure on banks to extend questionable loans to help companies survive the GVC has forced the big four to hike their provisions (estimated at around $20 billion) for loans going sour.

Unsurprisingly, with an estimated $65 billion of retail property loans sitting on their books, the bulk of banks' impairments will come from the commercial property sector, where landlords and the tenants in currently embroiled in massive arm wrestle over mandated rent relief. In the meantime, sectors where impairments are expected to be greatest include education, and tourism.

$210 billion in un-serviced loans

It's estimated that around 274,000 ($56.5 billion) of the 703,000 loans ($210-plus billion) that have been deferred are business loans, personal loans and credit cards, with residential loans making up the rest. The reality check for businesses and mortgagees alike is that they will have to start repaying debt once the hibernation stage of the COVID-19 crisis ends.

However, adding to the banks' problems is the strong likelihood that the 'repayment holiday' will go on a lot longer than anticipated. The longer the repayment of these loans are stalled, the more nervous banks will become about them being repaid, especially with the costs of deferring business loans continuing to mount.

But unlike the GFC when the official cash rate was set around 6%, today's ultra-low borrowing costs makes it easier for banks take a 'wait-and-see' approach to potentially problematic loans. This explains why only a fraction of the estimated $210 billion in loans currently in deferral are expected to end up defaulting.

Adding another layer of comfort for banks, the much anticipated crash in residential property prices hasn't materialised, with property prices having risen slightly in April.

The lure of banks without dividends

The single biggest issue for investors is whether the big four remain an alternative to dismal term deposit rates. At face value, this looks like a no-brainer. After all, with the RBA's official rate of 0.25%, deposit rates will be 1.25%, which means that after inflation and tax, investors are out of pocket by around -1%.

However, with shareholders likely to receive either a much lower interim dividend or no dividend at all – due in part to the high bar that's been set by the prudential regulator – the argument for holding bank shares becomes much less compelling. What's also adding to banks' troubles right now is the estimated 10% freeze on mortgages, plus a 15% hold on SME loan repayments.

Australia and NZ Banking GrpLtd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC) have deferred their dividend completely. Macquarie Group Ltd (ASX: MQG) paid a dividend 50% lower at $1.80, while National Australia Bank Ltd. (ASX: NAB) paid an interim dividend of 30 cents, down 64% on FY19.

Then there's the Commonwealth Bank of Australia (ASX: CBA), which hasn't had to report yet but is also expected to take a scalpel to its dividend in August.

Before the recent rally, the market responded to expectations that ANZ and Westpac would mimic the Bank of Queensland Limited (ASX: BOQ)'s decision to shelve dividends. Both banks share prices fell sharply.

While the recent rally offers cold comfort, the sobering question for shareholders and investors is how long will bank dividends be deferred for, and will a lower dividend policy become the new norm?

Have banks been oversold?

Intuitively, the short answer is a resounding no. Banks know better than anyone it's going to be impossible to sustain investor support without the appeal of above-average dividend yields.

The banks entered the GVC with the most robust balance sheets ever, courtesy of APRA's tighter regulatory and lending measures. So, it could be argued they've been oversold on the expectation that the fallout from COVID-19 will be a protracted affair. But assuming COVID-19 has only a short-lived effect on book quality, as many are predicting, the banks look well positioned for a near-term rebound.

Based on its bottom up analysis, Goldman Sachs suggests the banks can sustainably earn a highly respectable 10% return on equity in the current environment. The good news for investors is that this implies a 72% dividend payout ratio. However, factoring in dividends at 50% – in line with global forecasts – might be more in keeping with banks' short-term profitability.

While the broker's numbers suggest the sector should trade on 1.3x – around 24% above where it's trading now – not all banks have the same appeal.

Look out for a deep dive into how to value the big four banks tomorrow morning, in which I'll discuss the evaluation criteria specific to banks, and highlight some standout bank shares to consider.

The post How bankable are the big four ASX bank shares in 2020? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the shares mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

But the good news is that the recovery we're most likely to experience will look less like a U or W-shaped recovery, and more like the Nike 'swoosh'. The swoosh is akin to a Goldilocks-type bounce-back – not too hot, yet not too cold. A swoosh-shaped recovery bodes well for these 3 ASX 200 shares that remain seriously oversold since the beginning of the year.

McMillan Shakespeare Limited (ASX: MMS)

A decline in underlying net profit of 21.7% at half-year, plus challenging market conditions, compounded by the coronavirus, have seen the McMillan Shakespeare share price tumble to $9.03. That's 42% lower than the $15.70 it was trading at in late November.

The professional services firm is a market leader in novated leasing, asset management and related financial products and services. But with so much of the workforce currently receiving the government's Jobkeeper wage subsidy, it isn't a great time to be offering these types of services. However, during its COVID-19 update on 8 April, the company expected to see its salary packaging activity go higher on the back of state governments increasing the size of the health workforces.

While the company has withdrawn earnings guidance for FY20 in light of the COVID-19 shutdown, the current MacMillan share price represents a 17% discount to Morningstar's fair valuation of $10.18. Based on a P/E ratio of 12 (at the time of writing), the stock is trading on a discount to its sector peers (14.5) and the overall market at around 15.9.

As with all stocks right now, lack of clarity coming out of the pandemic is a little unnerving. But with McMillan's net debt at around 42% of its market cap, the company's balance sheet looks well positioned to emerge from the downturn ready to capitalise on new opportunities.

Southern Cross Media Group Ltd (ASX: SXL)

The Southern Cross Media share price declined 9.4% last week, but the media company (formerly Macquarie Media Group) – which is responsible for brands including 2Day FM, Triple M and the Hit Network – is already up 66% this week to $0.25 (at the time of writing).

This is great news for shareholders who recently witnessed a 244% increase in Southern Cross' existing shares on issue. This was following a $169 million equity raising early May, issued at a whopping 45.5% discount. The company has also renegotiated its bank loans and plans to draw an extra $57 million from its existing debt facilities.

The expanded war chest will be kept on its balance sheet to improve liquidity, and reduce its net debt position. At the end of 2019, the company had just $22.5 million in cash on hand and $353 million in drawn down debt. With current liabilities ($81 million) equal to 6% of its total assets, the company looks well positioned to trade through the crisis and rebound during the recovery. The fundamentals of the company's business remain sound, and the consensus recommendation on the stock is a strong buy, with Morningstar putting fair value at around $0.34.

AP Eagers (ASX: APE)

Dragged lower by the coronavirus mass sell-down, which accentuated the slowdown in car sales, the AP Eagers share price is trading around 24% lower than its pre-COVID-19 price of $9.01.

The auto dealership group's growth-by-acquisition strategy over the past 20 years has been impressive. Since then, it has boosted sales revenue from $500 million to $5.8 billion. Assuming April marks the low-point – with sales down 48.5% on the previous April – an upswing in car sales could mirror the recent boom in Australia's home improvement market. What will help the company capitalise on the market's recovery is the underlying strength of its balance sheet, which includes $270 million in cash, and undrawn corporate debt facilities.

Together with a further $122 million OEM working capital, AP Eagers has available liquidity of $392 million. The consensus recommendation on the stock is a moderate buy, and at $6.81 it is currently trading at a 26% discount to Morningstar's fair value of $9.24.

The post 3 ASX 200 shares to buy for a Goldilocks-style bounce back appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Did you miss the bottom? Don't panic, so did the most of the chief investment officers, who are paid a lot more than you to get it right.

That's not to say heightened volatility isn't here to stay for a while. However, while we'll still see spreads of 2–3% on a given day's trading, the expectation of the market moving another major leg down – which most institutional buyers are still praying for – now looks less bankable.

But if you've been brave enough to take positions in stocks over last few weeks, congratulations. Three years from now your entry point will (with the wisdom of hindsight) look compelling.

Did fund managers drink too much of their own Kool-Aid?

Ironically, it is fund managers, many of whom still refuse to admit how much they were zigging when the markets were zagging, who've been the last to heed their own advice. Namely, start accumulating oversold stocks. Assuming they reluctantly admit that the bottom has now passed, institutional buying over the coming weeks should provide a much needed kicker to the stocks you recently bought.

With COVID-19 affecting fundamental assumptions on blue-chip stocks we previously thought were bankable, like Flight Centre Travel Group Ltd (ASX: FLT), only the truly brave want to shout about the market bleeding value. After all, COVID-19 has delivered an existential shift to the earnings of many stocks.

However, the COVID-19 impact appears to have been overstated. Many stocks have been forced to re-emerge from the ashes with better, leaner and more profitable business models.

Swing back to value

With market dynamics being more impacted by central bank policy than fundamentals, it's been hard for investors to draw a meaningful bead on value. However, with stocks in the value bucket now looking (at face value anyway) decidedly cheap, it could be time for active value-based fund managers to finally shine.

The resurfacing of value plays should offer strong clues as to where institutional money will find a home over the next few weeks. Riding the coat-tails of this buying strategy may not be such a silly idea, especially with the phased easing of COVID-19 lockdowns acting as an inflection point for a full economic recovery.

Assuming the likelihood of a second wave of COVID-19 is alleviated, Australia should – courtesy of the government's $214 billion fiscal response – emerge strongly from our low-point of economy activity in April.

Here are 3 ASX 200 shares that make good value plays in the current environment, in my opinion.

Crown Resorts Ltd (ASX: CWN)

The late April decision by private equity firm Blackstone Group Inc to take a 9.99% stake in Crown Entertainment at $8.15 a share, provides some insight into what sectors are attracting the attention of institutional investors. While the stock has bounced up to $9.11, it's still trading at a 32% discount to its 52 week high of $13.40.

Despite the coronavirus, Crown is still on track for the progressive completion of its new jewel, Crown Sydney, from late 2020.

The company recently secured $1 billion in fresh debt to weather the coronavirus shutdown. After paying its half-year 30 cents a share dividend, and $203 million to 95% of employees who were stood down, the company still has around $500 million in cash on hand.

Star Entertainment Group Ltd (ASX: SGR)

Crown's rival Star Entertainment also benefitted from a vote of confidence in both the wagering sector at large, and its mid-April COVID-19 response. While the share price is now up around 62% after dipping as low as $1.62 in late March, it's still trading at a 46% discount to its 52-week high of $4.93.

It's too early to put definitive numbers around Star's future earnings, but the market is clearly excited over its $3.6 billion Queens Wharf joint venture, which it plans to open late in 2022. While the Brisbane River development is being marketed as an 'integrated resort', it is expected to hold up to 2,500 poker machines.

Within its COVID-19 response, Star revealed that it stood down over 90% of its workforce in response to the shutdown of its activities in Sydney, the Gold Coast and Brisbane. In the meantime, after recently raising $200 million in fresh debt, the company has available cash and undrawn debt facilities of around $700 million.

The company is also advancing a business interruption claim through its insurer. The outcome of this claim hasn't been factored into its cost and cash flow expectations. Based on a commitment not to pay a cash dividend until gearing is below 2.5 times, its lender has agreed to waiver debt covenants for the next testing date of 30 June.

Aristocrat Leisure Limited (ASX: ALL)

Unsurprisingly, slot machine group Aristocrat has witnessed similar share price falls to gaming stocks since early March. But after tumbling as low as $15.44, Aristocrat shares have now bounced back up to $25.58.

Aristocrat stood down 1,000 staff until the end of June, following the decision by virtually all its land-based customers globally to suspend operations. It also cut 200 roles permanently from the business, and moved another 200 full-time roles to part-time.

Aristocrat has a conservatively geared balance sheet with $1 billion in liquidity and no near-time refinancing requirements. This should allow it to rebound quickly once customers start to ramp up their patronage.

Foolish takeaway

Given the speed with which Australia (and the world) want to return to normalcy, Star, Crown and Aristocrat should be early beneficiaries once COVID-19 restrictions begin to lift. This also bodes well for the resumption of regular dividends.

The post 3 ASX 200 value plays for an economy hell-bent on recovery appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Story has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Crown Resorts Limited and Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.