Firstly, it could be important to remember that investing is a long-term endeavour. What happens this month or even this year may be long forgotten in a few years from now. For example, the GFC saw huge declines for some share prices. But then there was a recovery for many businesses in the subsequent years.

But, during the time of a bear market, how are investors meant to invest and make returns?

Well, it may not necessarily be with something going up when everything else is going down. It may be finding a share, or shares, that has been hurt heavily but then goes on to recover strongly.

One of the fund management outfits that is typically effective at finding good opportunities during periods of volatility is Forager, which operates the Forager Australian Shares Fund (ASX: FOR).

Forager's advice

The Forager chief investment officer, Steve Johnson, had some wise words to say about the current investment environment for ASX shares. He said:

You need to identify businesses with characteristics that you like. Those characteristics might be the consensus view at the time that you find it, but you agree with it and you like it. You need to do your research and value the business and then you need to wait for the right environment.

What does that environment look and feel like? Well, you want to see a lot of selling. You want to see market panic and you want to see sector and business disdain. You yourself are probably going to be feeling very nervous and very uncertain. If you're not feeling that emotion then it's not a dysfunctional market.

What about the wider market? What sort of factors will we be able to see in the described scenario?

You're going to be reading bearish headlines in the paper or online and you're going to be seeing brokers downgrading their estimates for businesses. Really importantly, there's probably no obvious reasons for things to change in the short term. If it was obvious the share prices wouldn't be where they are.

That's what a dysfunctional environment feels like. And that's what we're seeing in the small cap end of the market at the moment.

What kind of ASX shares does Forager currently own?

In the latest Forager fund update, the company outlined a couple of quarterly updates from businesses in its portfolio.

Whispir Ltd (ASX: WSP) – Forager described Whispir as a communications technology business. The fund manager noted that the ASX share "burned through" $5.2 million of cash in the three months to 30 June 2022. It ended the quarter with $26.1 million in the bank account.

But, Forager said the cash flow figures don't give a true representation of the progress that the business has been making. The fund manager noted that commentary in the cash flow summary suggested revenue will exceed prior guidance of 42% growth and that costs are well controlled.

The fund manager thinks that the next financial year should already see free cash flow generation.

Bigtincan Holdings Ltd (ASX: BTH) — this business is described as a sales and training software provider. It finished the quarter with $39 million cash after utilising $4.9 million over the three months to June 2022.

Forager said that growing revenue and a declining cost base "should result in free cash flow" this financial year. The fund manager noted that the annual revenue run-rate rose a "healthy" 25% organically to $120 million. This was slightly above prior guidance and "sets the business up well for future years".

The post How and where can an ASX investor make money in a dysfunctional share market? appeared first on The Motley Fool Australia.

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Forager Funds Management senior analyst Gaston Amoros tells why now is the time to buy up small-cap ASX shares.

Investment style

The Motley Fool: How would you describe your fund to a potential client?

Gaston Amros: My name is Gaston Amoros; I'm a senior analyst at Forager Funds Management. Forager Funds Management is a value-oriented funds manager. It's been around since 2009. 

Our historical return, or at least the number that I have in my head, is 16% compounded per annum over the last 10 years. And I think that's around 500 points, so 5% of alpha versus our benchmark. Our benchmark is the All Ordinaries Index (ASX: XAO) and the fund is a listed investment trust in the ASX under the ticker Forager Australian Shares Fund (ASX: FOR).

In terms of investment philosophy, we typically invest in stocks that are unloved and undervalued. On any given year, the market will present you opportunities, and for some time the opportunities have been typically what people describe as value stocks. These are stocks that have actually rewarded us with the performance that we've been harvesting for the past 18 months or last couple of years, I would say.

We typically go wherever the opportunity is and wherever we see value emerging. That value has worked very well over the last couple of years. We think that now we are starting to see an opening up of opportunities in small-cap growth in particular.

The other sector that could be interesting is, what people normally describe as COVID beneficiaries that are being thrown out with the proverbial wash water. But I think the one that is more interesting, and that probably I'm hoping that the one that would actually build our returns in the second, over the next couple of years, will be small-cap growth that is now suffering the same fate as some value stocks a few years ago. 

Biggest convictions

MF: What are your two biggest holdings?

GA: Given that we're talking about that [small-cap] bucket and given that I think it's where the opportunity is for your readers and where we see the opportunity emerging these days, I think Whispir Ltd (ASX: WSP) would be one of them.

Whispir is a service platform that helps automate communications workflows with customers or employees via SMS, email, social media posts, etc. They have around 1,000 customers. And they count names that people will be familiar with — like Telstra Corporation Ltd (ASX: TLS), Foxtel, Chemist Warehouse, Australia Post, Qantas Airways Limited (ASX: QAN) and a bunch of others. 

So someone like Chemist Warehouse, if I remember correctly, they started in 2016 with one use case — particularly it was they were using the Whispir platform for click and collect notifications. I think today there are around 6 use cases, which include COVID vaccinations, e-prescriptions, click and collect, and a few other things. 

Another customer, for example, [is] the City of Christchurch Council in New Zealand. They use the Whispir platform to coordinate emergency response in the case of earthquakes or in the case of tsunamis. 

This is time-sensitive, mission-critical communications, either among an employee base, or customers.

MF: The share price is down more than 40% over the past 12 months, but your team still has plenty of faith in the future?

GA: We have plenty of faith in the future. It's one of our largest positions in this sleeve of high-growth companies. We started buying Whispir, I think it was around the middle of the year… entry price was around $2.50. So I think we're slightly underwater at the moment, but we have a 3-5 year investment horizon, and we're very confident that we will make more than our fair share over that period of time. 

Whispir has grown 20%, 30% per annum, historically. They upgraded their FY22 guidance at the time of their AGM. They just reported fiscal Q2. So this is December and they were growing 27% year-on-year. And they added a record number of customers.

Also, very importantly, in December they announced that transformational deal. They signed Singapore Telecommunications, or Singtel, as a partner in the Asia-Pacific region. So Telstra does the same job for the Whispir here in Australia and New Zealand. 

Telstra gave them 80% of the revenue that they have in Australia and New Zealand. So if Singtel does anything remotely similar to what Telstra has done for Whispir in Australia, this deal is very transformational. And there isn't much in people's numbers for this deal. This is a deal that will start contributing in size from FY23. So what it actually does is de-risks the growth profile. 

Last but not least, Whispir is traded at around 3 times EV [enterprise value] to revenue. This compares to Xero Limited (ASX: XRO), WiseTech Global Ltd (ASX: WTC), and Altium Limited (ASX: ALU) that are trading between 15 and 20 times EV revenue for a similar growth profile. That gives you an idea of the potential risk-reward here.

MF: And your other big holding?

GA: The other one that's worth mentioning, which is big for us, is Bigtincan Holdings Ltd (ASX: BTH). 

Bigtincan is a leader in sales enablement software. What sales enablement means is essentially a software platform that you deploy either in mobiles or in tablets or in laptops to your salesforce. It does basically 4 things: sales content management, sales training and coaching, document automation, and internal communications. So it's a bundle. And it integrates to your salesforce.com or to like your SAP or to whatever other ERP or CRM solution people are using. 

But the important thing to understand is, not all software is created equally. There are software products that insert themselves at the front-end where the revenue is generated for the company, where you get the incremental dollars. And you get software solutions that go in the backend, which are nice to have and they fulfil an important role, but they're not mission-critical. It's hard to measure the utility of the backend products, whereas the front end, it's very clear. Either they're helping to make more revenue, or they're not. 

Bigtincan is one of those that is at the point of friction where the salesforce is actually generating the revenue. You get all that for $7 a pop — basically $7 per user per month. So it's actually a small investment across a large workforce and the customers are pretty happy. 

The proof of that is in the fact that it's been growing ARR [annual recurring revenue] at more than 30% organically over the last few years. The total number is 50% compounded because they've been buying and rolling up companies — but their organic growth is north of 30% over the last few years. It's 97% recurrent revenue. It has pretty interesting unit economics.

We are very excited — but again, we are a 3-5 year investor. We are very excited about what the future looks like. 

The post 2 small-cap ASX shares we've bet big on: fund manager appeared first on The Motley Fool Australia.

Shares for GameStop Corp (NYSE: GME) then surged from US$20 to as high as US$483 in just a couple of weeks.

And with that, the term "meme stock" entered the mainstream lexicon.

There's been a massive influx of new and young stock investors since the COVID-19 pandemic shut everyone in at home last year. 

Add to that the share market's spectacular recovery from the March 2020 crash and it's not entirely a surprise that there is a crowd always seeking to jump on the next moonshot stock.

But, according to one expert, it's now time to take a cold shower.

Watch out, it's 2017 all over again

Forager Funds chief investment officer Steve Johnson said that his funds, including the Forager Australian Shares Fund (ASX: FOR), had a fantastic time enjoying the fervour for ASX shares in recent times.

"For us, being agile, open-minded and willing to be contrarian was more important than ever last year. It allowed us to invest in a collection of unloved businesses at once-in-a-lifetime prices," he wrote in Money magazine.

"And it paid off. The 2021 financial year was the best on record for Forager across both our Australian Shares Fund and International Shares Fund."

But ASX shares were now entering a different era, and the familiar indicators have Johnson worried.

"Right now, interest rates remain at record lows, stock markets are trading at all-time highs, people are inventing new metrics like revenue multiples to justify absurd prices for growth stocks, inflation is becoming a serious concern and COVID resurgences are weighing on the economic recovery," he said.

"More importantly, there are very few pockets of undue pessimism."

The conditions remind Johnson of 2017 when his funds tried to keep looking for hidden gems — then ate humble pie for 2 years.

So faced with the same situation now, he calls on investors to get serious.

"It is time, once again, to be thinking about the benefits of safe and boring," Johnson said. 

"Once again, like 2017, investor obsession with hyper-growth and high returns has left some of these stocks neglected."

Your ASX shares don't always have to stand out

According to Johnson, his team learned an important lesson from the difficult 2018-2019 period.

"You don't always need to be doing better than the crowd," he said.

"There is a time and place for contrarian bets. And there's a time for playing it safe."

Counterintuitively, taking a simple investment strategy is not actually that easy after a period of finding shooting stars.

"To turn to our loyal client base and say 'you know how we look for opportunity in unlikely places? Well, we just bought Downer EDI Limited (ASX: DOW)'," said Johnson.

"That doesn't sit well with how we view ourselves or what our clients have come to expect. And that's what makes it so hard."

The post Investor warning: Time for sensible and 'boring' ASX shares appeared first on The Motley Fool Australia.

One particularly stubborn trait that people show is not being flexible in their opinions, according to Forager Funds chief investment officer Steve Johnson. 

After all, this very human characteristic is the whole basis of politics and prejudice.

"Whatever the topic, humans form their opinion early on. And the vast majority of them refuse to budge," he said in a letter to clients. 

"No matter how much contradictory evidence they receive, especially if their reputation is closely intertwined with a prior view."

But this rigidity is antithetical to success.

"Philip Tetlock and Dan Gardner's book Superforecasting: The Art and Science of Prediction devotes chapters to showing how the world's best forecasters constantly adapt their predictions as new information arises, sometimes dramatically," Johnson said.

"When it comes to investing, our inability to recognise that our prior opinion was wrong can prove extremely expensive."

Johnson still struggles with this human trait

The last 18 months is a prime example of people around the globe struggling with their innate desire to stick to their guns.

"Do masks work? Do lockdowns work? Are lockdowns worth the economic impact? Do vaccines work? Will it be a V-shaped recovery or a U-shaped recovery? Are stock markets overvalued or undervalued?"

Even as an expert professional investor, Johnson still struggles with this basic human nature.

"It was psychologically painful to change my view when writing for The Intelligent Investor. It isn't much easier as a relatively transparent fund manager," he said.

"And all of my prognostications and presentations about the importance of understanding human psychology hasn't always stopped me succumbing to the pitfalls."

Share market glorifies those who predict the future

Despite knowing that rationally no one knows what will happen in the future, the investing world still pays much attention to fortune tellers.

"It is incredibly hard in a society and an industry that glorifies people who claim to know the future. But recognising that we are often wrong is one of our greatest competitive advantages," said Johnson.

"A big part of my job as Forager CIO is creating an environment where people are encouraged to change their mind — and where I help them recognise when that needs to happen. Psychological bias is much easier to see in other people than it is to notice in yourself."

The share price for Forager Australian Shares Fund (ASX: FOR) has rocketed up more than 90% over the past year. The unlisted Forager International Shares Fund returned 69% for the year ending 31 July.

The conscious effort to be open to changing one's opinion was a major contributor to Forager Funds' recent success in wild times, according to Johnson.

"It helped us recognise when our own assumptions were wrong and, in many cases, allowed us to take advantage of others' unwillingness to accept mounting evidence that didn't align with their prior view," he said.

"It is an attribute that is only becoming rarer in a world of armchair experts."

The post The 'extremely expensive' habit that can kill your investments appeared first on The Motley Fool Australia.

In part 1 of our interview, Forager Fund senior analyst Alex Shevelev explained how his Forager Australian Shares Fund (ASX: FOR) spots bargains that others are ignoring. Now in part 2, he reveals the boom US company listed on the ASX that doubled his money in just a few weeks.

Overrated and underrated shares

The Motley Fool: What's your most underrated stock at the moment?

Alex Shevelev: RPMGlobal Holdings Ltd (ASX: RUL), I think that is the most underrated stock. And I think it's underrated partially because many investors are not looking at it and are not appreciating just the quality of revenue and cash flows the business produces. And also not appreciating the opportunity for the business to grow over long periods of time. 

I mentioned the very sticky revenue [in part 1]. That's a really attractive characteristic for a business and a management team as incentivised as [chief executive] Richard Matthews is usually difficult to find.

MF: Because of the recurring revenue, I guess you're not too worried about the cyclical nature of their clients, the mining companies?

AS: The products themselves are very sticky with the end clients. Every once in a while a mine may close, but the environment we're currently seeing is very positive for a lot of their clients. So actually, they're more likely to take on more technology rather than less. 

In 2020, we saw a low in their sales. In 2021, in the first quarter, that bounced back really quickly. And we think that's as a result of those mining companies really seeking that technology coming to RPM because they've got very good quality products. And signing those based on a subscription model, which we think should start to be more recognised over the next little while. The stock also has very little institutional coverage from brokers, and that sort of keeps it under the radar.

MF: What do you think is the most overrated stock at the moment?

AS: There were some tech and consumer discretionary names that had, at the beginning of this year, some characteristics of extraordinarily high expectations from investors. Those businesses have fallen in price quite dramatically over the last couple of months as those expectations became a little bit more reasonable.

In fact, some of those stocks are becoming potentially more reasonably priced and, if this continues, may actually become attractively priced.

MF: Are you holding some cash in order to take advantage of some opportunities?

AS: We are. We're holding some cash and we've also, as we mentioned [in part 1], have Mainstream Group Holdings Ltd (ASX: MAI), which is under multiple takeover offers. So we think that's an opportunity that will turn into cash in the near future.

MF: If the market closed tomorrow for 5 years, which stock would you want to hold?

AS: I'm not going to surprise you with my answer, I don't think. I think the cash flow characteristics for RPM and just the stickiness of that revenue is something that you can be quite confident of over a 5-year time horizon.

Looking back

MF: Which stock are you most proud of from a past purchase?

AS: We talked before about market dysfunction, and one of the ones we bought during that [last year] is Life360 Inc (ASX: 360). It's a family tracking app. It's got about 28 million global users, and out of that, about 900,000 families pay for that service.

We invested in June 2020, while there was still a hangover from the COVID dysfunction, as well as post-IPO disappointments. The business had only recently listed and hadn't performed well subsequent to its IPO [initial public offering].

Now, interestingly for Life360, they had been growing their users quite quickly over the past couple of years, both organically and via acquiring paid users as well. Paid users would cost in terms of marketing spend. And the business was loss-making because they were spending a lot acquiring those paid users.

Interestingly the organic growth itself was quite quick. So really, the paid user acquisition was just cream on top, and that paid user acquisition was coming at very high returns on that spend. 

Then the business was trying to introduce a lot of features into their membership plans, and they were looking to increase the value of those membership plans. So when we looked at the business, we saw that if they hadn't been spending all that very high-returning money on marketing for the product, they would still be growing organically, and the earnings multiples at that point were very reasonable. They're doing quite well now. 

They announced a small acquisition recently. They're looking at a larger acquisition, and they're also looking to dual-list in the US, where the market for these sorts of businesses is more mature than it is in Australia.

MF: Do you sometimes get suspicious about US companies that choose to list in Australia? If your business is so good, why wouldn't you just list in the US where there's more capital?

AS: I think that's fair above a certain size.

So the Australian market for 360 has allowed them to list on an exchange but at a scale that would not be possible in the US.

Now that they have grown quite quickly over the couple of years that they've been listed in Australia, they've had the access to capital here. They can now look to list in the US given their larger size.

MF: Life360 share price did pretty well immediately after you bought it in June 2020, didn't it?

AS: Yeah, so what happened after that was we started getting a little bit more recognition that the business wasn't completely going away because of COVID, that the business had actually had some sustainable characteristics to it, and we think it's quite a sustainable revenue stream and a quickly growing revenue stream. 

Then most recently, we saw more news around the US opening up — more kids leaving the house. And that's really helpful for Life360 because the parents are going to be using the app to monitor those children and their driving behaviour and their location.

MF: It's almost like a tech stock that's also a COVID recovery story, isn't it?

AS: That's right. And we put it into both of those buckets when we were considering the risk from it. It was definitely not a COVID beneficiary, but it was a business that benefited from the reopening. 

And, yeah, as you can see in June, I think the stock was about $2, now they're trading closer to $5.40.

MF: The company also hired Randi Zuckerberg as a board member this year, didn't it?

AS: That's right. Yep. So they've enhanced the board in the last couple of months, and that's really helpful getting them on the radar, both with Australian investors and with the US investors, if they do choose to list over there as well.

MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.

AS: The fund is up about 112% [in the 12 months] to April.

But we really had the opportunity to actually do better than that. There was really the most prospective environment during those first couple of March, April, May months that I'd seen since 2009. So we really took advantage of a few, but we didn't necessarily have as much cash as we would have liked to take advantage of the others. We've had a good result, but it could have been better.

Our cash levels at the end of March got very, very low as we saw lots of prospective opportunities. A lot of stocks that were interesting businesses that we knew, or even some that we held, that were [sold] off dramatically, often on small volumes, especially for smaller stocks. We had the opportunity to pick up both new investments, as we've talked about with Life360, and more shares in companies where we had already been invested, at really discounted prices.

The post This ASX tech share's also a COVID-recovery stock: fund manager appeared first on The Motley Fool Australia.

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Forager Fund senior analyst Alex Shevelev explains how his ASX-listed fund nabs under-appreciated bargains, plus the stock it's still holding after 9 years.

Investment style

The Motley Fool: What's your fund's philosophy?

Alex Shevelev: At the Forager Australian Shares Fund (ASX: FOR), we're opportunistic investors. We hook and gravitate towards unloved and under-appreciated stocks. And it's often stocks and sectors that others aren't able to, or won't, be particularly interested in.

The fund is a listed investment trust. So it's listed on the ASX and can be purchased in the same way as other ASX shares. We're currently trading at a 10% discount on its net asset value.

MF: To give our readers an idea, what are your two biggest holdings?

AS: There are actually two very interesting names. 

Mainstream Group Holdings Ltd (ASX: MAI) is actually our largest holding at the moment. You may have seen the auction process for Mainstream that's been ongoing for about the last couple of [months]. 

But I might take you back to the beginning. We've actually been the shareholder in Mainstream since the IPO [initial public offering], the largest institutional shareholder, and the business has some really interesting characteristics. It is a highly recurring revenue stream. Once a fund manager like Magellan signs up for fund administration services, they usually don't change for a very long time… 

The business has been growing really well but didn't quite attract investor attention and, in fact, spent the better part of the last 5 years somewhere between 40 and 60, 70 cents.

Meanwhile, they'd been growing revenue more than 20% per annum into June 2020. So we thought the business had been doing a pretty good job… but it wasn't really being recognised in the market. 

So we went to the board and management and proposed a strategy for communicating with investors to close that gap. But then also to put the business in a position where it could be auctioned off. And that auction strategy was because the business is more valuable, given it's a recurring revenue stream, in the hands of a much bigger player.

They've executed that really, really well. So [chief executive] Martin Smith and the team there communicated well, the stock ran up to a little over $1 at the beginning of the year. 

The management and the board, headed by Martin Smith — they actually gave up some of the upside on their own shareholdings in the business. They got the auction process started at $1.20. The subsequent bid to that was $2, and now we're at $2.65.

The second largest is RPMGlobal Holdings Ltd (ASX: RUL). They provide software for mining companies and mining contractors. It allows a mining company to work out, for example, what part of the deposit to mine next or when a piece of equipment needs to be maintained. 

So it's an enterprise software business. Those have some interesting characteristics. Chief amongst them is that revenue is often very sticky. Much like Mainstream, someone puts in a piece of software within a key process in a mining company, they're hesitant to change that, and that product will often be in place for a very long period of time. 

Interestingly, RPM was going through a transition that wasn't quite recognised by the market. They used to sell their software on a perpetual license and maintenance model, so they would charge quite a lot up front and then a smaller maintenance fee over time. They were moving that to a subscription model, which is roughly equal amounts over each year. 

That meant that revenue and profits were in fact lower in the first couple of years while the business was growing and doing quite well. [But] it didn't quite look like that when you looked at the accounts. 

The management team at RPM also attracted us to the business. So [chief executive] Richard Matthews is an executive in this space that has done a lot with enterprise software businesses in Australia. He took over and sharply increased the spend on software for the business and really went about developing some products that are best-of-breed, the best technology, and is happy to spend money developing those products. 

It could be another M&A candidate. Even without that, though, we think in the financial year 2023, RPM will be trading at a price-to-earnings ratio of about 15 times, excluding the excess cash on the balance sheet. Then in the subsequent year that drops down to about 10 times.

Buying and selling 

MF: What do you look at closely when considering buying a stock?

AS: We start with: Is there a psychological edge to this purchase, or is there an analytical edge? I'll run through the two elements. 

The psychological edge is more like March 2020. Market panic, lots of uncertainty around COVID, lots of selling across the entire market. Other things in that psychological edge category: over-reactions to specific company news or to sector news, [and] motivated selling. 

For example, an investor might not be able to hold a particular stock if that stock drops out of an index or becomes too small for them — or the money is being redeemed and that investor is a forced seller. So that's the psychological edge component.

On the information edge side, we try to understand the businesses very well. So misunderstood business models are one of the interesting elements to that informational edge [as] I talked about RPM earlier. 

Often we get these opportunities in smaller stocks or in areas of the market that we know well — where we have spent time researching other investments.

Sometimes we pick up orphaned [businesses] that may not belong to individual markets. We had an investment in Virgin Money UK CDI (ASX: VUK), which we bought in April of 2020 — that's a UK bank listed in Australia. It creates a little bit of uncertainty amongst local investors who may not be across the business.

Beyond those reasons, the psychological and the informational edge, we do look at as much information as we can gather. So we look at the quality of the business. What it does, where it sits in the industry, what sort of returns on capital we can expect, how sustainable the cash flows of the business are. We look at the management aspects — who are we actually trusting with our money? The history of treating shareholders well and successfully running businesses, like the one they're currently running, is helpful. 

We are quite valuation-driven in our approach. So we do make sure that we pay an appropriate price for the cash flows that we expect and the growth of those cash flows over time.

MF: What triggers you to sell a share?

AS: Oftentimes, that's when the thesis is not playing up. So we think that a business should be progressing in a particular way and it's just not getting there. Something's gone wrong.

Perhaps it's something in the numbers, perhaps something in the environment and our confidence in the future cash flows that we had originally assumed gets dented. That's a situation where the thesis doesn't play out. 

Where the thesis does play out, we're also interested to see when we sell out of a stock. So again, we looked at our view of the appropriate valuation for the business to really drive the exit. We are cognisant, though, that oftentimes the businesses that we've gotten right continue to get better, and other investors may be more excited than us about certain stocks that may well inform our exit as well.

MF: Do you have a horizon in mind when you buy in?

AS: We're long-term investors in our stocks. So we've held one investment in the fund since inception in 2009, and we've held quite a few others for a very long time as well.

MF: What is the one you've held since 2009?

AS: That's Enero Group Ltd (ASX: EGG). It's a marketing services business which we've held for a long time, and it's had an interesting history over the last 10 years. One of the businesses in its marketing services umbrella has particularly started to perform very well over the last 12 to 24 months. And the stock price has rallied dramatically on the back of that as well.

Tomorrow in part 2 of our interview, Shevelev reveals the stock purchase that he's most proud of.

The post How to score a sneaky bargain: ASX fund manager appeared first on The Motley Fool Australia.

Forager chief investment officer Steve Johnson said that Forager Australian Shares Fund (ASX: FOR)'s portfolio gained more than 4% over the February reporting period.

"In general, you'd give it a tick for reporting season," he said in a Forager video.

"With COVID over the past 12 months, [results] were particularly closely watched, although often largely flagged by companies leading into reporting season."

The Forager Australian Shares Fund share price has gone from $1.09 back in September to $1.40 as of Thursday's close.

There are three ASX shares the fund currently holds that showed exciting prospects during February reporting, according to Johnson and senior analyst Alex Shevelev:

RPMGlobal Holdings Ltd (ASX: RUL)

RPM Global provides technology services to the mining industry. It's currently Forager Australian Shares Fund's largest position. 

The business has been around for more than 50 years, so is a lot more mature than many of its tech peers on the ASX.

Shevelev was anxious going into the RPM results announcement because there had been a pattern of enterprise suppliers experiencing delays in signing contracts.

"It seems like in the result what we saw was, yes, a slowdown," he said.

"But some of the detail in that presentation was very helpful to work out that in fact, in the last calendar quarter of a year things were turning around and so far this quarter we've actually seen a lot of new contracts signed."

Software providers that sell to businesses rather than consumers had done it tough in the past year, according to Johnson.

"Last year, every 5 million [dollars] of contract wins that they'd done they made an announcement on the stock market. We hadn't heard anything since the full year [results]. Last year they gave an AGM update that wasn't great," he said.

"So we were quite nervous about this result, yet the number was quite good, at least until the end of February."

Johnson added that he was now "pretty excited" about RPM's future, while Shevelev said RPM has attractive revenue dynamics.

"It's important here that what we're adding is a really high quality recurring subscription revenue. And because it's a very low churn, so not much of it goes away year to year, every dollar we're adding now will build up forwards."

Life360 Inc (ASX: 360)

The Life360 share price skyrocketed in mid-January with the news that former Facebook Inc (NASDAQ: FB) executive Randi Zuckerberg had been appointed to the board.

Although listed on the ASX, the company is American and it sells trackers to US parents for their teenage kids.

Shevelev said with COVID lockdowns hitting that country hard, the demand for such an app would have waned.

"Nonetheless, the company has been able to increase revenue year-on-year, and with the reopening of the US with higher value plans and with more people actually taking on paid plans, they're talking about revenue growth in the order of 25-35% in this current year."

Johnson said the guidance was "surprisingly bullish".

"There was also some talk in their announcement about either a dual listing or a relisting to the NASDAQ in the US, which would certainly apply higher valuations in this climate than where we're currently seeing in the share price."

MotorCycle Holdings Ltd (ASX: MTO)

The coronavirus pandemic has been a boon for the motorbike and accessories seller, according to Shevelev.

"It's been a phenomenal time to be selling motorcycles because you've had people being able to withdraw from super, you've had people being able to spend on domestic activities like motorcycles rather than international travel," he said.

"Net profit was up 250% year on year, which is a phenomenal effort. And it looks like from the guidance that… activity level has continued into the current year."

According to Johnson, MotorCycle Holdings' balance sheet used to be "worrying" but the February accounts showed it was "completely fixed".

"They've done a lot over the past few years to improve their market share, to grow the underlying size of the business and I don't think we've yet seen the full impact of that in the results," he said.

"So people are looking back and saying, well, if it goes back to 2019 profitability, and I put that on 12 or 13 times earnings, I get today's price. I think there are sustainable earnings here, well and truly above what they made in 2019."

Shevelev said the necessary reforms had now been made and it was just a matter of getting products into their stores.

"That's actually very profit accretive because you don't have to spend the extra operating costs.

"There's a lot of self-help work that the company has done that, in addition to cutting costs, [is] really going to come through over the next couple of years."

The post Software and bikes: 3 ASX shares ready to explode appeared first on The Motley Fool Australia.

The takeover usually involves a purchase price higher than the market price, so there is a handsome profit involved. The buyer is hardly going to low-ball the existing shareholders, otherwise they won't approve the sale.

One recent example on the ASX is Amaysim Australia Ltd (ASX: AYS).

The telecommunications provider is currently in the midst of a takeover from listed investment company WAM Capital Limited (ASX: WAM). WAM offered 70 cents for each Amaysim share in cash or 85.6 cents per share in WAM stock.

This gave Amaysim's shareholders a 15.6% premium to the one-month volume-weighted average price after the end of October.

So should investors try to buy up shares that could become takeover targets?

Takeovers only happen on the way up

Forager chief investment officer Steve Johnson said that cheap stocks often end up with a takeover as the happy ending for investors.

But they rarely happen for companies enduring a difficult time.

"You tend to see them once the business has at least turned around," he said on a Forager video.

"Once it's recovered and the share price is reasonably fair and then someone can pay a sense of premium to that and everyone is happy."

He took advertising agency WPP Aunz Ltd (ASX: WPP) as an example in the Forager Australian Shares Fund (ASX: FOR) portfolio.

WPP AUNZ in December received a buyout offer from its parent WPP PLC (LON: WPP).

"That takeover bid is 70 cents compared to a share price that was down in the 20s back in March, and maybe early 40s when we first bought it."

According to Forager senior analyst Alex Shevelev, the company transformed during the COVID-19 period to improve its performance.

"During calendar 20, the management team was doing some pretty good things to try to get the business back onto even ground. They were cutting costs," he said.

"The parent company that already owned 62% of WPP, of course, was aware of what was going on there and that things were improving. Clearly they felt that was a good opportunity to launch a bid for the remaining portion that they didn't own."

Relying on takeovers for returns: right or wrong?

This is why investors should not be solely relying on the possibility of a takeover for return on investment, according to Johnson.

"If you're relying on them for value realisation then you're in trouble — because it means something else has gone wrong with your investment," he said.

"That's my advice to everyone: Make money and pay dividends, and if we get a takeover then that's the cream on the cake — not the reason that we own the stock."

The next likely ASX takeover 

Shevelev named Eclipx Group Ltd (ASX: ECX) as another company with huge potential for a buyout.

It plays in the car fleet management industry where economies of scale are "very dramatic".

"So if you had an acquisition of this business by one of the other two players… the synergies across that group would be very significant," he said.

"That's coupled with a restriction on the number of deals that can be done here because the industry is getting quite consolidated after a period of mopping up of smaller players."

Johnson agreed that Eclipx is "a good example".

"I think the economic rationale for it in that sector is very significant."

The post Should you buy ASX shares that are takeover targets? appeared first on The Motley Fool Australia.

Valuations for some growth companies are now at historic highs, and that has many investors worried that we're in a bubble.

GMO co-founder Jeremy Grantham warned of exactly that earlier this month, saying current times are "terrifying" and that the huge bubble would pop soon.

"Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives," he said.

"Here we are again, waiting for the last dance and, eventually, for the music to stop."

But two Australian experts have advised investors to stop wasting energy worrying about a market crash.

"Don't constantly worry about a market collapse," Marcus Today director Marcus Padley said on Livewire.

"Just be alert to it. React, don't predict."

Forager Funds chief investment officer Steve Johnson agreed.

"If 2020 proved anything, it was that predicting the future is extremely difficult, if not futile," he said in a letter to investors on Thursday.

"We didn't predict the market bottom in 2020. We didn't anticipate the fastest bear market recovery on record. We simply tried to construct the best portfolios we could with the opportunities that were in front of us."

Reacting is more important than predicting

Johnson humbly referred back to a blog post he made on 17 February last year. This was a few days before stock markets around the globe started plunging.

"Investors have reacted perfectly sensibly to a significant event that is still unlikely to have a dramatic impact on the value of equity markets," he said at the time.

Despite this clearly incorrect prediction, Forager's funds performed well last year. The internal shares fund returned a very nice 38.3%, while Forager Australian Shares Fund (ASX: FOR) returned 21.6%.

"Writing a blog that looked foolish in hindsight was probably a blessing in disguise," Johnson said.

"It served as a timely reminder that great investment returns come from finding great investment opportunities. While many of those who predicted a market meltdown were wasting their time trying to identify the bottom, we were out there looking for stocks to buy."

Just because the calendar ticked over to 2021 it shouldn't change the themes relevant to stocks, according to Padley.

"Expect the bull market to continue – until it doesn't," he said.

"There is always something to worry about, but we really don't need to worry about things that could happen until they happen."

Here's what to do

Instead of losing sleep over the prospect of a market crash, both experts recommended being aware of the biggest risks for 2021.

Keep monitoring for any signs that those risks might rear their heads. Then if one does seem like it's likely, adjust your portfolio accordingly.

Padley said one risk he saw was the current vaccines could become ineffective because of a coronavirus mutation.

"Pandemic beneficiaries would soar, recovery sectors dump, gold will fly, and the market will briefly collapse. Mild forms of that will come with anything that dents the market's global economic assumption or delays it."

One big risk that both experts warned was any evidence that inflation was on the way up. That would force central banks to consider pulling up interest rates.

According to Johnson, investors have been assuming low interest rates to justify piling into many investments such as Tesla Inc (NASDAQ: TSLA) shares.

"There are theories, from ageing populations to technological improvements and low cost labour substitution, that explain low inflation or even deflation as a permanent feature of the developed world," he said.

"I don't have a strong view that those theories are wrong. But I know that when the whole market thinks something can't possibly happen, the consequences of that assumption being wrong are significant."

Padley thought central banks would be wary about hiking up rates too soon.

"The central banks are unlikely to allow a repeat of the 'taper tantrum' that caused the market to fall over in October 2018, so we can probably relax for this year at least."

The post Stop worrying about a market crash: Do this instead appeared first on The Motley Fool Australia.

According to Forager Funds chief investment officer Steve Johnson, share markets have now gone too far ahead of economic recovery from COVID-19.

"I think it's going to be a difficult year," he said on a Forager video.

"People need to expect those returns from equities to be lower than they've been historically from today's pricing level. That makes it more difficult."

The major dark cloud in 2021, according to Johnson, is interest rates heading up in response to a steep economic recovery out of the current recession.

"If we're ever going to see pressure on interest rates going up and inflation, it's going to be over the course of the next two years," he said.

"I think that's the big risk for financial markets of all sorts out there, that interest rates start to pick up over the next few years and that people start looking at 5% and 6% returns on equities and saying 'Well, I can get 3% on a bond portfolio now. I want more.'"

His perspective is a contrast from other finance experts who have predicted a boom year for equities in 2021.

BetaShares chief economist David Bassanese said last month earnings forecasts have "held up remarkably well in recent months".

"We are looking at 15 per cent growth in forward earnings by end [of] 2021 if current expectations hold up."

Johnson's cautiousness was why his team's funds, including Forager Australian Shares Fund (ASX: FOR), are concentrating on current cash flow.

"We're really positioning ourselves to be [in the] short duration we own businesses that are going to give us cash flow in the short to medium term, rather than using low discount rates to justify high prices for businesses down the track."

Buying in dips takes nerves of steel

During last year, the Forager team took advantage of the volatility to pick up some bargains during the dips.

But that takes courage because no one knows when the market's hit the bottom until afterwards.

"At the times when the best opportunities are there, it is going to be stressful," Johnson said.

"That's probably my most important role as CIO here that I get up in those times of crisis and I say to our whole team: 'Everyone is panicking, it is time for us to invest.'"

He added this is why it's important during quiet times to prepare a target list of stocks one will buy if the market sinks.

"[Being] ready to pull the trigger in those environments is the most important thing that you can do to take advantage of it."

Johnson recalled how his team was able to pick up shares of a very prominent US tech company during the panic last March.

"We copped a lot of criticism for our investment in Uber Technologies Inc (NYSE: UBER) at US$24 a share. It's trading north of US$50 now and it really was widespread panic in that part of the market that nobody was ever going to start using that company's products again," he said.

"I don't think anyone that actually sat down and did a proper analysis of what that business was worth at the time would have concluded it was worth less than US$24."

The share price for Forager Australian Shares Fund was at $1.15 a year ago but traded at $1.38 as of late Monday afternoon.

The post Warning: 2021 is going to be difficult appeared first on The Motley Fool Australia.

Fund managers who short a stock will make money if the price goes down. It's hardly an endorsement for the company.

So what happens if you read that a share that you own has been shorted?

Forager Funds chief investment officer Steve Johnson recently addressed this dilemma in a company video. 

Here's the good news

For any share that you purchase or hold, you need to research both the pros and cons of the company behind it.

This means a report from a short investor is a non-emotive way to educate oneself about the risks, according to Johnson.

"We always want to know what the bear case is on a stock if we've got a strong bull case, and understand why people on the other side are selling it."

Johnson said fundies who short a stock are usually pretty public about their concerns. Perhaps they're motivated to speak out in order to push the price down.

"You can go and get the report, you can read it, do your own research and work out whether you think they are right or not."

Perhaps you agree with the short case and decide to sell or not buy.

Huge upside

But say you disagree with the short investor and you hold onto the shares. 

According to Johnson, if the heavily shorted stock surges in value it'll be a better windfall than other shares.

Why is this?

"The big upside in these stocks is that when they are wrong, it can cause a surge in the share price in a very short period of time as they're all rushing to get out of their positions."

Johnson said the level of short interest in each ASX stock is published on the exchange's website.

"It's a really good idea if you are researching something on the long side, go and have a quick look at how big the short interest is.

"Then you can usually Google a short interest report about the company that you're looking at. It's an interesting way of seeing the bear case."

Forager Funds runs the ASX-listed Forager Australian Shares Fund (ASX: FOR). Its share price is up more than 15% for the year, trading at $1.36 on Wednesday afternoon AEDT.

The post What to do when your shares are heavily shorted appeared first on The Motley Fool Australia.

According to my Fool colleague Sebastian Bowen, the stock has risen 244% so far this year and a spectacular 1,200% since the March COVID-19 trough. The price hit yet another all-time high on Monday.

Wonderful stuff. 

But shareholders now have an absolute headache: when do you exit?

Yes, it's a great problem to have. But it's a problem nevertheless.

Can the buy now, pay later provider continue its rise, or should retail investors cash in their handsome profits before the dream is shattered?

There is a hint from the professionals on how to handle this.

Chloe Stokes, research analyst at Forager Australian Shares Fund (ASX: FOR) revealed last week she grappled with a similar situation.

"Farfetch Ltd (NYSE: FTCH) is a digital platform for the luxury industry. They operate on a global scale, including here in Australia," she told a Forager video.

"I've been interested in the business from a consumers perspective for a couple of years. I've ordered from the platform, and so have a lot of people that I know. The stock has been loosely on my radar for a year or two."

After watching the volatile share price and doing research on its business model, Stokes' consumer interest slowly converted to a professional one.

"It listed in late 2018 in September at US$27 a share – by December that year, it was trading below US$18," she said.

"It got down as low as US$7 in March this year. Of course, we wish we bought it back then, but we were looking at other things. In June, when it was trading at around US$20, we started to do some pretty deep research on the stock. And we started to get comfortable around the value that was in the business."

Forager ended up buying in the middle of this year for mid-US$20s. 

Then it took off.

"Since then the price has run up pretty significantly… it's up more than 100% on our purchase price," said Stokes.

"COVID has been great for them, consumers are forced to shop online. And for somewhere like China, where they did a lot of their luxury spending internationally, they have been forced to find new ways to purchase those luxury goods. Farfetch has been a huge beneficiary of that."

Farfetch shares are now trading for US$60.08.

What to do with a pot of gold?

So what would Stokes' team do now that the price has rocketed up? Cash in or hold on?

Making the decision harder for Forager is that it thinks the company has excellent growth prospects in the future.

The revenue model for Farfetch has eerie similarities to Afterpay, in that the merchant – not the end customer – pays a fee to the platform.

How long would suppliers put up with this expense?

"You might think Farfetch is taking sales from those designer brands. And they're paying them, say, a 30% take rate for the pleasure," said Stokes.

"But if you look at it from another angle, Farfetch… is actually broadening the market for luxury goods, and especially for luxury goods online, because it's getting rid of a lot of constraints that those retailers would have had in their bricks and mortar stores." 

Afterpay enthusiasts say the same – merchants lose margin but the buy now, pay later brings in additional sales that they would not have otherwise had.

"They are expanding the definition of luxury," said Stokes.

"Farfetch has two-thirds of its sales coming from millennials and Gen Z consumers… It's not just the fancy designer bags on there. There's expensive streetwear – you'll see pairs of Nikes on there."

Here's what Forager did

Stokes said she had many sleepless nights trying to figure out what to do with these now-inflated shares.

Her team ended up having their cake and eating it.

"We've sold more than half of what we initially bought in Farfetch. I think it's [now] down at a manageable position," she said.

"It is a brilliant business and one I want to own in the portfolio for a long time. I still think there's a lot of upside from here, although it's not as obvious as it once was."

Forager is an investment house based in Sydney. Its Australian Shares Fund is trading at $1.39 per share, which is 18% up year-to-date.

The post Sell now or hold forever? What to do with shares like Afterpay (ASX:APT) appeared first on The Motley Fool Australia.

But now as interstate borders reopen and possible vaccines offer hope for future international trips, share prices for the sector are starting to look up.

But two fund managers have warned there is one prominent ASX travel stock that is already a potential value trap.

Flight Centre Travel Group Ltd (ASX: FLT) has flown from $11.26 at the end of October to now $17.90 – an almost 60% climb in just 5 weeks.

It's thus already overvalued, said NAOS Asset Management Limited portfolio manager Ben Rundle.

"What investors are missing with Flight Centre is that the majority of their earnings actually come from the corporate side of the business," he told Livewire.

"That corporate market, I don't think is going to recover as quickly as everyone thinks. While the leisure market might be full when everyone's piling into airports to go on holidays, I think they're overestimating the benefit that Flight Centre will get from that."

Flight Centre has raised a lot of cash and closed a lot of stores

In its 2020 financial year results, Flight Centre revealed it had a cost base of $230 million per month. The company was forced to raise $900 million in April to stay alive then issued $400 million in convertible notes last month.

Flight Centre has also closed 408 retail stores this year, leaving just 332 to recoup the losses.

Forager Australian Shares Fund (ASX: FOR) chief investment officer Steve Johnson said Flight Centre's current price already has recovery built-in.

"The bull case might be, 'Well, as this business recovers, all of that working capital comes back into the business and you can give the cash back to shareholders'," he told Livewire.

"I don't mind the business. I think it's got some long-term issues, but again, I think the share price is fully pricing in the recovery that is going to come."

Other travel shares also rallied in November on the back of favourable conditions. Webjet Limited (ASX: WEB) has risen 65% since the end of October, Qantas Airways Limited (ASX: QAN) is up 31%, and Corporate Travel Management Ltd (ASX: CTD) is 32% higher.

The post This ASX travel share is already too expensive: fundies appeared first on The Motley Fool Australia.

Two notices that have caught my eye today are summarised below. Here's what these fund managers have been buying:

BWX Ltd (ASX: BWX)

A notice of initial substantial holder reveals that Eley Griffiths Group has been buying this personal care products company's shares over the last nine months. According to the notice, the investment management company has been building its position between 23 October and 31 July. During this time it has acquired 6,852,439 shares, which gives it a 5.04% stake.

Eley Griffiths appears to have been buying BWX shares for its EGG Small Companies Fund. As of the end of July, this fund has delivered an average return of 8.24% per annum over the last five years. Judging by its purchases, it appears to believe the addition of BWX could help its market beating run continue.

iSelect Ltd (ASX: ISU)

A notice of change of interests of substantial holder shows that Forager Australian Shares Fund (ASX: FOR) has been topping up its position in this price comparison website company. The notice reveals that Forager has picked up around 5.5 million more iSelect shares between 7 June and 3 August. Its biggest purchase came on the latter date, when it picked up 5 million shares for a total of $1,026,628. This equates to an average of 20.5 cents per share. That purchase lifted its holding to a total of 24,053,874 shares, which equates to an 11.04% stake.

The iSelect share price has been an incredibly poor performer over the last few years, but it appears as though Forager believes the tide is turning. Though, with the fund manager's key Australian Shares Fund lagging the market by an average of 5.7% per annum over the last five years and 16.6% per annum over the last three years, I wouldn't be in a rush to follow its lead just yet.

The post Fund managers have been buying BWX and this ASX share appeared first on The Motley Fool Australia.

With RPMGlobal shares surging 15.42% so far this week, the company's market capitalisation currently sits at $270.53 million.

So, what is there to know about this ASX small cap share and why is its share price on the move?

What does RPMGlobal do?

Formerly known as RungePincockMinarco, RPMGlobal is a mining software and consultancy business.

The company's major operations are the development and sale of mining software (a high-quality revenue stream), advisory (experts in mine design, takeovers and planning), and testing and compliance.

Why is the RPMGlobal share price rising?

Yesterday, RPM released a trading update to the ASX in regard to growth in its total contracted value (TCV) and annualised recurring revenue (ARR).

In the release, the company announced that the TCV of new committed software subscriptions signed in FY20 has reached $21.5 million. Additionally, its ARR from software subscriptions currently stands at $10.7 million per annum.

Yesterday's update, which pushed the RPMGlobal share price 5.1% higher, follows a previous announcement on 22 January 2020 which sent shares surging 18.7% on the day.

The January announcement was in a similar vein to that of yesterday, with RPM reporting a $7.3 million uplift in TCV to $17.7 million and $2 million of additional ARR from the two-month period since 19 November 2019.

Tick of approval

Prior to yesterday's rise, however, shares of the mining software company were already moving higher. Tuesday saw a 5.6% gain, which coincided with a change in substantial holding ASX release.

In an announcement released after trading hours on Monday, listed investment trust (LIT) Forager Australian Shares Fund (ASX: FOR) provided notice that it had recently accumulated 2,380,181 RPMGlobal shares for total consideration of $2,566,360. This implies an average purchase price of $1.078 per share over a 3-week period that began on 22 January, the same day that RPM provided the aforementioned subscription update.

This recent purchase was in addition to the 12,299,223 RPMGlobal shares already owned by Forager Funds.

Since this ASX LIT aims to invest in undervalued businesses, its recent accumulation of RPMGlobal shares may have given those questioning whether shares were overrun some added confidence.

Investors starting to take notice

In any case, this week's share price rise comes as RPMGlobal shares continue to gain momentum following the release of its FY19 results. Since the release in August 2019, the RPMGlobal share price has risen nearly 125% to reach yesterday's closing price of $1.235.

Under the leadership of CEO Richard Mathews, an enterprise software company veteran, RPM is now in the final stages of its transition from a business primarily focused on mining consultancy to a company offering a full-stack suite of software products.

After roughly 6 years of considerable research and development spend, RPM now offers mining software across 10 commodity groups (e.g. coal, iron ore, etc.) for a range of mining methods (e.g. under and above ground).

The company has also been transitioning away from upfront perpetual license revenue in favour of selling its software on a recurring subscription model.

All this has meant that RPM's financials have taken a hit, with lumpy and low-margin advisory revenue hiding the potential of what could soon become a sticky software subscription business.

Now that RPM is continuing to book in subscription growth, all the while keeping the market cognisant of its progress, investors seem to be starting to take notice and rerating shares accordingly.

Foolish takeaway

Yesterday's TCV and ARR update marked another milestone in RPM's early journey into the software-as-a-service space.

RPM advised that its next market update will occur when TCV exceeds the $25 million mark. In the meantime, the company is set to release its half-year FY20 results to the ASX early next week.

The post Why this ASX small cap has rocketed 15% this week appeared first on The Motley Fool Australia.

Not since of the introduction of MasterCard and Visa cards in Australia has the shopping and payment process changed as much.

Afterpay charges $0.30 transaction fee and a commission that the retailer pays, of between 4% to 6% of the sale price. Plus Afterpay receives any late fees if the customer doesn't make the repayments to Afterpay on time.

For now, retailers using Afterpay are seeing a rise in sales, perhaps because it brings forward sales rather than fundamentally increasing the overall cashflow in the system.

However, some commentators are pointing out that retailers may soon see Afterpay as an expensive cost and could increase prices to compensate. That would mean that non-Afterpay users would be paying higher prices to theoretically subsidise the users of Afterpay.

Gareth Brown from Forager Australian Shares Fund (ASX: FOR) has suggested that everyone who is willing to pay upfront should ask for a discount, such as 5%, where buy now, pay later options are available.

It does make sense why upfront-payers could be given a discount. Why should people pay more for goods if they have nothing to do with the higher costs of the business due to Afterpay?

Afterpay users could actually make themselves better off by using Afterpay considering there are no costs of using the service if you pay on time. Imagine if you were trying to maximise every dollar. You could pay through Afterpay, and with the temporary cashflow delay you could put that cash in the bank and earn interest until the next Afterpay instalment was due. But, that would be a lot of effort for not much reward. I think it's best to just pay upfront for items.

I applaud Mr Brown for suggesting that people paying upfront should be rewarded. I appreciate that Afterpay is a wonderful new system, but it may end up penalising people who don't use it if retailers increase their prices to compensate.

The post Do you get a retail discount when you DON'T pay with Afterpay? appeared first on The Motley Fool Australia.

I think that's a good question to consider in the current investment environment. Transurban Group is one of the world's largest biggest toll road businesses – it builds them, owns them and operates them.

Here are some of the best reasons to consider buying and avoiding Transurban shares:

Buy reasons

Transurban currently trades with a trailing distribution yield of 4.8%, which is a lot better than what you can get from a bank account these days.

The income has been steadily growing too, the distribution per unit has grown from $0.40 in 2015 to $0.56 in 2018. Any asset you're considering should display growth potential.

Transurban is growing nicely both locally and internationally. Its well-established toll roads in Melbourne, Sydney and Brisbane are seeing slow-but-steady growth of traffic numbers and it's also managing to increase the price of the toll too. The planned WestConnex toll road should be a big boost in the future. Internationally, it is growing in both USA and Canada.

Avoid buying reasons

The first reason that most investors would point to is the valuation. It's trading at 69x FY19's estimated earnings with a very large debt figure on its balance sheet. There's more to Transurban's valuation than simply its price/earnings ratio, but it does show it isn't cheap.

Well-respected fund manager Steve Johnson from Forager Australian Shares Fund (ASX: FOR) recently questioned whether toll roads are actually that defensive in a downturn. If your money is tight, wouldn't you rather spend a bit more time driving over paying a toll?

In the longer-term there are questions about how automated cars will affect toll roads if the vehicle has the option of avoiding the toll road.

Foolish takeaway

Transurban is a business that operates many high-quality assets, however I think there are other defensive businesses out there that may be more attractive opportunities for income like Rural Funds Group (ASX: RFF).

However, both Rural Funds Group and Transurban are trading expensively. If you're looking for growth I think there are better options for us on the ASX.

The post Is the Transurban Group share price a buy? appeared first on The Motley Fool Australia.

He published an article for Livewire musing there are three groups of shares to consider. The first are ones where the share prices and business models are under threat, with shares like Retail Food Group Limited (ASX: RFG), iSentia Group Ltd (ASX: ISD) and AMP Limited (ASX: AMP). He cautioned these businesses may do even worse during a recession.

The next group contains banks, consumer discretionary shares and anything property related. He said these businesses look cheap on a historical earnings basis, but earnings are likely to fall in the short-to-medium-term.

The final group contains businesses that should be fine but are expensive compared to the rest.

Mr Johnson thinks the housing downturn has only just started, so the wider economic effects are yet to be felt.

He has chosen 12 ASX50 shares, but excluded Wesfarmers Ltd (ASX: WES) and Transurban Group (ASX: TCL). Wesfarmers is too reliant on Bunnings and toll roads may not be as defensive as people think.

The 12 ASX50 shares he went for were:

Amcor Limited (ASX: AMC) and Aristocrat Leisure Limited (ASX: ALL) for their overseas earnings which could benefit from a low Australia dollar.

Woolworths Group Ltd (ASX: WOW) and Ramsay Health Care Limited (ASX: RHC) for the defensive nature of their industries.

BHP Group Ltd (ASX: BHP) and Aurizon Holdings Ltd (ASX: AZJ), he said they're reasonably priced with attractive yields, although the exposure to China raises the risk profile.

Two other resource plays, one being Woodside Petroleum Limited (ASX: WPL) with a belief that the oil price will be higher over the next few years. Global inflation is returning, which could make Newcrest Mining Limited (ASX: NCM) a decent idea for protection insurance.

The healthcare giants of CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH) have seen pullbacks to make them better valued, Mr Johnson said they're wonderful businesses.

His final two picks were Computershare Limited (ASX: CPU) and Insurance Australia Group Ltd (ASX: IAG) for their reasonable valuations and decent yields.

Overall, this portfolio if equally weighted has an average yield of 3.3% and a forward price/earnings ratio of just under 20.

Foolish takeaway

Mr Johnson thinks this portfolio could generate returns of 7% to 8% per annum over a long period of time. It may also allow you to sleep easily at night, which may be hard for some in 2019.

If I were to narrow the choices down to a list of five, my picks would be CSL, Cochlear, Amcor, Aristocrat and Ramsay. I generally avoid all resource businesses. Ramsay makes my cut because of the ageing tailwinds, but Woolworths is trading too expensively for its likely long-term growth rate.

The post Top fund manager names 12 ASX shares for a recession proof portfolio appeared first on The Motley Fool Australia.

Nick Scali is a furniture business that imports directly from manufacturers overseas, then sells the tables, sofas etc. in its national store network.

It has been a strong-performing business for shareholders, over the past five years its share price has risen by around 100% – this return doesn't even include the dividends paid.

In FY18 Nick Scali delivered revenue growth of 7.7% to $250.8 million, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 12.7% to $62.8 million and earnings per share (EPS) growth of 10.1%.

However, the share price has actually fallen by 23% over the past year. Quite a lot of that fall occurred when the furniture retailer updated to the market at its AGM when it said "same store sales growth will be challenging in this volatile trading environment, particularly given the significant slow-down in residential sales, a key driver and catalyst for future furniture sales."

But, there is plenty still to be positive about. In FY19 Nick Scali plans to open six new stores, of which four are already open and trading, including a second store in New Zealand.

Nick Scali also plans to launch its bedroom and bedding range. Expanding the amount of items it sells can be a good tactic, it will give Nick Scali a good new source of earnings and challenge businesses like Adairs Ltd (ASX: ADH) in the mid-tier range.

However, Alex Shevelev from Forager Australian Shares Fund (ASX: FOR) recently wrote for Livewire that Nick Scali faces a triple whammy of problems, particularly with a weaker Australian dollar: lower sales, lower gross margins and higher staff & rent costs (as a percentage of sales).

Foolish takeaway

Nick Scali is trading at 10x FY18's earnings with a trailing grossed-up dividend yield of 11.1%. If Nick Scali can slightly increase its profit year on year then the dividend alone could beat the market over the short to medium-term.

Whilst Nick Scali is cheap, I think it's a bit of a gamble to invest at this stage – there is probably a lag between falling housing prices and Nick Scali's sales. I believe there are better ASX ideas out there at the moment.

The post The Nick Scali share price is down 3%, is it a buy? appeared first on The Motley Fool Australia.

Here are two managers thoughts on Livewire on shares to watch this reporting season:

John Ayoub – Wilson Asset Management

Newly-promoted portfolio manager John Ayoub from WAM Capital Limited (ASX: WAM) believes that energy and resource companies could create a few earnings surprises with Origin Energy Ltd (ASX: ORG) being one that could return to dividends sooner than expected.

He also said that US dollar earners could be an opportunity, he named QBE Insurance Group Ltd (ASX: QBE), News Corp (ASX: NWS), Sims Metal Management Ltd (ASX: SGM), James Hardie Industries plc (ASX: JHX) and Boral Limited (ASX: BLD) as potential opportunities.

Alex Shevelev – Forager Funds

Furniture retailer Nick Scali Limited (ASX: NCK) may have too much optimism baked into the price according to Alex Shevelev from Forager Australian Shares Fund (ASX: FOR).

He said that revenue growth of around 10% is expected by the market in FY19 and FY20. The rising housing market encouraged people to fill their renovated homes with quality furniture, but falling prices could see homeowners shut their wallets.

Lower sales could lead to lower profit margins, which could then lead to the market trading at lower earnings multiples.

Ominously, he said that the next five years are unlikely to be anywhere near as good as the last five for Nick Scali.

Foolish takeaway

I'd agree with most of the comments made above. If companies give negative outlooks then those businesses could be particularly damaged by the end of this month.

A lot of house-related businesses like Nick Scali are likely to face some trouble in the next couple of years as consumers may decide to focus on paying their mortgage rather than buying new goods.

The post Fund managers reveal some shares to watch in reporting season appeared first on The Motley Fool Australia.