'Quite interesting': Expert reveals 3 ASX stocks to buy now

Ask Fund Manager

The Motley Fool chats with the best in the industry so you can gain insight into how professionals think. In this issue, Redpoint Australian Equity Income Fund portfolio manager Max Cappetta names three ASX stocks he plans to buy now, all of which pay dividends.

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The Miscellaneous Fool: What are the three best stock buys today?

Max Cappet: The first is Orora Ltd (ASX:ORA) — a packaging company.

They operate in about 70 countries. The main market, obviously Australia, but also North America. Well, for people who may not know the name of the company, it’s possible that you interact with Orora many times every day, as they provide bottles and caps, aluminum beverage cans, soft packaging boxes, and cartons. They are really the dominant players in Australia.

They are less dominant in North America. And I think this is an interesting part of their business because being able to grow their market share in North America really gives them an interesting growth base over the next few years.

Now the company has a stated payout ratio of around 60% to 80% of net profit after tax (NPAT). So at the moment, with the share price dropping recently, the yield is quite interesting at 4.5%. That’s dishonest, so you get that cash dividend yield and lo and behold, it’s about 30% below its pre-COVID price of $4. We think this looks quite attractive for a globally diversified business that is quite defensive on the whole, in providing all this packaging across a wide range of markets and products.

I: It’s fallen about 8% in just the last few trading days. No worries there?

Master of Ceremony: It’s really not about the company. More so, one of the brokers actually lowered their sights to hold. I really think… there could be a bit of an overreaction, and this might present a very good buying opportunity for a business of this quality, given their cash flow and profitability.

I: And the second?

Master of Ceremony: The other is sort of related, Endeavor Group Ltd (ASX:EDV).

Again, people may not recognize the company name—but you’ve probably done business with them many times, especially if you’ve been to Dan Murphy’s, or to BWS, or if you actually went to one of their 340’s. – strange hotels they have all over the country.

The effort spiraled out of Woolworths Group Ltd (ASX:WOW) last year, and currently 75% of its revenue comes from beverage distribution and 25% from its hotel portfolio. We think it has a very attractive balance of operating in public places, as well as supplying beverages to venues and retailers.

It’s not strong [as Orora] in terms of gross yield. So again, for income-focused investors, because we are in our Equity Income Fund, the gross return is 3.2%. That includes franking credits.

The other thing is that it has been a standout performer so far in 2022. While the market has retreated, it has actually risen to $7.80 from around $6.80 at the start of the year. We still find it interesting. We think that the advantages of being a stand-alone entity now allow management to clearly focus on turning what was their absolute market leader position into increasing profit margins in the years to come.

I: Is the market loving it because it expects the hotel-side business to grow now that more people are out and about in the post-lockdown era?

Master of Ceremony: Yes of course. And I think that’s one of the really exciting things for this business over the last few years, where when public places are clearly being restricted by COVID, they’re really taking more in terms of retail and distribution of drinks through retailers than they are. drink.

So what we’re seeing is that there’s this nice diversity, and when we start to see people coming back out and hoping in a post-COVID world, then they’re really taking that extra boost by having a portfolio of about 350 venues across the country.

I: Your third choice?

Master of Ceremony: The next one is WiseTech Global Ltd (ASX: WTC). This is one of them in the IT field. Yes, it has actually fallen along with the broader IT sector over the last few months. But, for those who don’t know WiseTech, it’s a global logistics software business.

I think one of the real things we love is their very impressive history of being able to increase their revenue and actually increase their profit margins year over year.

Even today, it’s not the kind of company you’d call a valuation option — it’s trading at about 80 times its next year or FY22 earnings, which will report soon. But it does have a global dominant position.

What we love about it is that it is able to increase its profits faster than its revenue growth, and that’s a really good metric you want to have behind some of these growth stocks, because that’s what the market really wants.

Now, in terms of the price drop, it may now be back in line with pre-COVID highs. However, its profit expectations for the 2022 financial year are actually about three times what it earned in the financial year ending 2019.

I: Wow.

Master of Ceremony: It has a huge profit expansion, but as I said, even today it trades with PE forward 80 times. Obviously it’s still there [are] high growth expectations for the company. But if you think about it, if they can double revenue again, over the next three to five years, we really don’t expect that it will trade at 25 times revenue within three years because that’s the only profit that doubles.

So, yes, there are risks in terms of interest rates in the broader IT sector, which continue to weigh on that assessment. But obviously one thing we like is that it is a profitable business. We see that there is profit growth through the market leader position. As I said, their ability to grow profits faster than revenue, if they can sustain it, then for people who are looking for that IT growth theme in their portfolio.

It also pays dividends, despite very low yields.

We think it could be one to watch out for, given how far it falls back into date.

I: For these tech businesses, once they reach the maturity stage where they make a profit, it’s a lot easier than the previous stage, isn’t it? Because they already built their product and it can be scaled at the push of a button?

Master of Ceremony: Very. That’s right. And that’s one of the main things we love about this business, the software is highly scalable. And if we start to see supply chains, cargo movements, etc., return to normal, I know we’re still talking about higher inflation, which means higher interest rates and maybe lower global growth, but if you need time the longer one. long-term view, then those are stocks you think in that industry would be worthwhile to expose.

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