Ask A Fund Manager

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, 1851 Capital portfolio manager Martin Hickson names three ASX shares investors should buy that drove strong returns for his fund.

Investment style

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

Martin Hickson: I'm Martin Hickson, portfolio manager at 1851 Capital, a reasonably newly established business and fund. 

We launched the fund back in February 2020. Both Chris Stott, who's my partner in the business, worked together previously at Wilson Asset Management for a decade together before setting up this business. 

Our style is we're a long-only small and micro-cap fund manager. We've got restricted capacity. We soft-closed the fund at $400 million back in August last year. From the launch, that was always the plan, to soft-close the fund once we got to that level. It's our belief that as you grow your funds under management past a certain point, it starts to inhibit performance, so that's why we've restricted the capacity of the fund. 

We invest in companies ex-S&P/ASX 100 Index (ASX: XTO) industrial companies, ASX-listed only. There's no pre-IPO or overseas companies, [no] unlisted assets. Our style is we're looking for growth companies with attractive valuations and a catalyst that can re-rate the share price.

MF: This year's been a tough time for smaller caps, hasn't it? How do you see things at the moment, and where do you see them going?

MH: Yeah, it has been a volatile time. The area of the market that we invest in, the small industrials, since we launched the fund just under three years ago, our area of the market's actually down by 15% over the first 33 months of launching the fund. [But] the fund's done okay. As of the end of October… from memory, it's up around 35%. 

It's been a tough 12 months, and it's been a very volatile almost three years for markets. Since we've launched the fund, we've been through two bear markets now, and a potential recession coming. We've been through the COVID pandemic, obviously a war, so there's a lot that's occurred in the first three years of the fund.

Hottest ASX shares

MF: What are the three best stock buys right now?

MH: The three stocks that I'll talk about, they're all companies that we own within the portfolio and at the smaller end of the overall market.

The first one is a company called IPD Group Ltd (ASX: IPG). A reasonably new entrant to the ASX, so listed back in December last year. It's been a strong performer. The share price has more than doubled over the last 12 months. 

What they do is they're an electrical equipment distributor and services company. If you go into a big apartment building or an office, you look at the electricity distribution room, and you see all the equipment in there, a lot of the equipment has likely come from a company like IPD Group. So power distribution, power monitoring, industrial control products.

It's been a very successful position for us. Despite the strong performance in the share price, it still trades at an attractive valuation — so they're 15 times price-to-earnings ratio, so quite cheap, below what the overall market's trading at. Their earnings are growing at over 20%. So very, very strong growth, but still trading at that cheap price. 

They extended their agreement with ABB Ltd. ABB is one of the largest electrical equipment manufacturers globally, with 30% market share. [IPD is] distributing all of those products in Australia on behalf of ABB.

The other thing we like about it is that they've got a growing EV business. They sell the equipment to install EV chargers in both residential homes but also in EV charging stations. They're one of the only ways to get exposure to that growing electronic vehicle thematic in the industrial space. There's obviously lithium, but this is one of the only ways to play it on the ASX in the industrial space. 

That's one that's performed strongly for us, but we still think there is further upside to that company.

Thirdly, they've got a strong balance sheet. They've got $25 million of net cash on the balance sheet, and that provides flexibility to potentially deploy that cash into acquisition opportunities.

MF: Fantastic performance, isn't it? It's not an energy company or a mining company, but it's more than doubled this year when everything else has flopped.

MH: Yeah, that's right. It's doubled in a period where the overall market's down just over 20%, so a lot of good tailwinds for that business.

MF: Great, your next stock to buy right now?

MH: Next one's a company called Atturra Ltd (ASX: ATA). They're an IT services company.

Similar to IPG, really. There's a lot of similar characteristics. They also listed around 12 months ago. We participated in the [initial public offering] IPO. It trades at a price-to-earnings ratio of 15 times, earnings rate 20% as well. And again, [a] very strong balance sheet — $30 million net cash on the balance sheet, similar to IPG. It gives them flexibility to potentially deploy that cash into accretive acquisitions. 

They've also given earnings guidance to the market back in August of $15 to $16 million of EBIT. We think that looks conservative. We think their earnings are growing at a very fast rate, but again, it's still trading at quite a reasonable multiple.

MF: You would think listing at the end of last year would be absolutely terrible timing, but both those companies have done really well.

MH: Yeah. If you look at the overall list of companies that IPOed in the second half of last calendar year, in that December half, there aren't many of them that have performed strongly. A lot of them are well underwater, but both IPD Group and Atturra have bucked the trend. They're up significantly since their IPO. 

Even in any market, in the micro-cap and small-cap space, there are always opportunities to find these gems that grow irrespective of what's happening in the overall economy.

MF: And your third pick, I think, is a bit more of a mature player?

MH: Yeah, the third is Capitol Health Ltd (ASX: CAJ). They're a radiology company. There's a couple of reasons why I like it. 

Firstly, their earnings are recovering post the COVID disruptions of the last couple of years. Their business is primarily in Victoria, so they were significantly impacted by the lockdowns there over the last few years, so they've seen a tailwind for their earnings this financial year. 

Justin Walter, the CEO there, who's been CEO for three years, has changed the business a lot since he joined. He's taken significant costs out of the business, he's improved the culture of the organisation, and also, in August this year, they acquired one of their competitors in Victoria, a business called Future Medical Imaging Group. That was an accretive acquisition for them, and it really reinforced that dominant position in the Victorian radiology market.

The other attraction is that it trades on a low EBITDA multiple of 7.5 times. We've seen, over the last couple of years, there have been private transactions where companies have been taken over at EBITDA multiples of 12 to 13 times. So based on those numbers, Capitol Health is trading a lot cheaper than a lot of those private companies were taken over at. That gives it very strong valuation support.

MF: The health industry is also defensive, isn't it, when an economic downturn is coming?

MH: Yeah, that's right, so better earnings streams … Like you say, quite defensive, given they operate in the healthcare space.

The post 3 small-cap ASX shares that drove fund up 35% while the market plunged appeared first on The Motley Fool Australia.

The end of ASX reporting season in August has led to a number of companies in the S&P/ASX All Ordinaries Index (ASX: XAO) turning ex-dividend this month.

When an ASX All Ords share turns ex-dividend, investors buying these shares won't be eligible to receive the company's upcoming dividend payment.

Instead, the dividend payment will go to the seller on the other side of the transaction.

What's more, a company's shares typically fall on the day they turn ex-dividend, reflecting the absence of the dividend.

Ahead of the ASX closure on Thursday, here are three ASX All Ords shares turning ex-dividend tomorrow.

NRW Holdings Limited (ASX: NWH)

To kick things off, NRW shares will be trading tomorrow without a fully franked final dividend of 7 cents. 

Investors who own NRW shares by the time the market closes today can expect to see this payment land on 12 October.

According to management, FY22 saw the best results NRW has reported.

Revenue grew by 5% to $2.4 billion while earnings before interest, tax, and amortisation (EBITA) came in ahead of guidance at $157 million, up 30% from the prior year.

On the back of these results, NRW hiked its final dividend by 40%, with annual dividends growing by a similar amount to 12.5 cents.

Based on current prices, this puts NRW shares on a trailing dividend yield of 4.9%. Adding in franking credits boosts this yield to 7.0%.

In other news, NRW made headlines recently after it launched a $375 million play to acquire MACA Ltd (ASX: MLD). However, this wasn't enough to sway MACA's board from an offer already on the table from mining services giant Thiess.

Macmahon Holdings Limited (ASX: MAH)

Next up, fellow mining services company Macmahon will also see its shares turn ex-dividend tomorrow.

Macmahon is set to pay out an unfranked final dividend of 0.35 cents to eligible shareholders on 7 October.

While this dividend may appear small in absolute terms, the Macmahon share price is currently sitting at 15.5 cents.

So, after throwing in the company's interim dividend of 0.3 cents earlier in the year, Macmahon shares are sporting a trailing dividend yield of 4.2%.

FY22 was a year of growth for Macmahon, lifting revenue by 26% to $1.7 billion. This was primarily driven by the contribution from new project start-ups, inflation, and increased contract activity.

This revenue growth partially flowed through to earnings, with underlying net profit after tax (NPAT) increasing by 5% to $63 million.

The ASX All Ords share held its total dividends steady at 0.65 cents, in line with the prior year.

Capitol Health Ltd (ASX: CAJ)

Rounding out this trio of ASX All Ords shares going ex-dividend on Wednesday is diagnostic imaging business Capital Health.

As of tomorrow, Capitol Health shares will no longer be trading with a fully franked final dividend of 0.5 cents, which will be paid on 21 October.

Capitol Health delivered revenue of $184 million in FY22, up 3% from the prior year. This was driven by organic growth, the acquisition of Womens' Imaging, and three greenfield clinic openings. 

These growth drivers were partially offset by COVID lockdowns, suspensions in elective surgery, and impacts from the omicron variant.

On the bottom line, statutory NPAT decreased 9% to $11 million.

Nonetheless, Capitol Health held its final and total dividends steady. The ASX All Ords share has declared fully franked interim and final dividends of 0.5 cents since 2019.

As a result, Capitol Health shares are currently flashing a trailing dividend yield of 3.0%. Including franking credits, this yield dials up to 4.3%.

The post 3 ASX All Ords shares going ex-dividend on Wednesday appeared first on The Motley Fool Australia.

WAM runs a number of different listed investment companies (LICs) including WAM Capital Limited (ASX: WAM), WAM Active Limited (ASX: WAA), and WAM Research Limited (ASX: WAX).

The fund manager likes to look for compelling, undervalued growth opportunities on the ASX share market. The below companies are two investment ideas that WAM recently highlighted.

IPH Ltd (ASX: IPH)

WAM described IPH as Asia Pacific's leading intellectual property (IP) services group with a network of member firms and clients in more than 25 countries.

Last month, IPH announced that it was buying Canadian IP agency Smart & Biggar for a total of $387 million.

The fund manager noted the acquisition will extend IPH's international secondary markets network beyond the Asia Pacific region for the first time and lift IPH "towards being a global leading IP services group".

IPH expects that the transaction will result in adding to underlying earnings per share (EPS) of approximately 10% in the first year of ownership and deliver access to more growth opportunities.

August was also reporting season. Last month, the company announced its full-year result, revealing a 14% year-over-year increase of underlying net profit after tax (NPAT) to $86.7 million as well as an 11% rise in underlying earnings before interest, tax, depreciation and amortisation (EBITDA).

Here is what WAM had to say about the company:

We remain positive on IPH and believe the business has a strong runway for organic and acquisition-led growth over the medium term.

Capitol Health Ltd (ASX: CAJ)

Capitol Health is described by the fund manager as a diagnostic imaging provider to the Australian healthcare market.

Last month, the ASX share announced the full-year result for its 2022 financial year which was better than the market was expecting. It also included the acquisition of Future Medical Imaging Group, a diagnostic imaging services provider, for a total cost of $56.1 million.

WAM pointed out the acquisition is expected to add to EPS in the high single digits. The fund manager said:

With a strong balance sheet and continued investment in well-defined growth opportunities, we believe the outlook for Capitol Health remains strong as diagnostic imaging providers recover from the coronavirus pandemic.

The post 2 little-known ASX shares that this fund manager says have 'strong' outlooks appeared first on The Motley Fool Australia.

With interest rates rising, many experts are urging investors to buy ASX shares that can maintain revenue through tough times.

One such sector is health, where the logic is that Australians will still need to treat their illnesses and injuries even if the economy is depressed.

Medical imaging provider Capitol Health Ltd (ASX: CAJ) is one company that's seen its share price drop significantly, to the tune of 32% so far in 2022.

Quality business that's too cheap

For Shaw and Partners portfolio manager James Gerrish, this dip has opened up a nice buying opportunity.

"We continue to like Capitol Health on valuation grounds," he said in a Market Matters Q&A.

"We think it's simply too cheap for the quality of their business."

While it is not widely covered by fund managers, on CMC Markets, three of the four surveyed analysts rate Capitol Health shares as a buy.

Gerrish likes the revenue profile of the company, considering the economic downturn we're heading into.

"It's… important to note that in a recessionary environment, 80%+ of Capitol Health's spending is Medicare based, providing downside protection alongside a balance sheet that has very minimal debt."

The ASX share also pays out a decent income, currently handing out a 3.7% dividend yield.

Healthcare is the hot industry right now

Switzer Financial Group director Paul Rickard noted last week that the health sector was enjoying a nice comeback in July after plunging this year.

The S&P/ASX 200 Health Care (ASX: XHJ) index is indeed up a whopping 9% this month, after dropping 12 % from January to June.

Rickard attributed this to recent weakness in the dominant banking and mining sectors, as well as a weaker Australian dollar.

"Banks, there are question marks about whether high interest rates will really impact profits and bad debts in the long term," he said on Switzer TV Investing.

"In the resources sector, people are still worried about commodity prices and the 'R' word — recession — and what that might do."

Financial results season is another consideration, Rickard added.

"We're coming into reporting season, and healthcare companies have traditionally done really well in reporting season."

The post 'Simply too cheap' ASX share that could plough ahead in a recession: expert appeared first on The Motley Fool Australia.

Can you believe May 2022 is here already? There are a number of ASX shares brokers rate as buys this month.

This article is about two smaller businesses that could be opportunities for investors to consider.

Here are two buy-rated stocks:

Elmo Software Ltd (ASX: ELO)

Elmo Software is an ASX tech share that provides HR and payroll software to small and medium businesses in Australia and the UK.

The Elmo Software share price has fallen 32% since the start of the 2022 calendar year.

Broker Morgan Stanley currently rates the ASX share as a buy with a price target of $7.80. That implies a possible rise of around 150% over the next year.

The company's FY22 first half result included growth in a number of areas for the business. Annualised recurring revenue (ARR) rose by 35% to $98.3 million, while reported revenue rose 41% to $43.1 million.

In that result, Elmo was able to report a positive earnings before interest, tax, depreciation and amortisation (EBITDA) after it rose by $0.9 million to $0.3 million.

Due to "strong trading conditions" and increased adoption of cloud-software solutions by businesses to manage remote and hybrid workforces, Elmo upgraded its FY22 ARR guidance to $107 million to $113 million.

Elmo said that "operating leverage continues to improve with a reduction in key spend ratios across the business".

Capitol Health Ltd (ASX: CAJ)

Capitol Health describes itself as a leading provider of diagnostic imaging and related services to the Australian healthcare market. It has clinics across Victoria, Tasmania, South Australia, and Western Australia.

The Capitol Health share price has fallen by 17% since the start of 2022.

The ASX share is currently rated as a buy by Ord Minnett with a price target of $0.44. That implies a possible upside of more than 30%.

Ord Minnett thinks the business has demonstrated the defensive nature of its earnings and that the end of COVID-19 will help the business.

In the first six months of FY22, Capitol Health announced that revenue rose by 11.2% to $94.9 million. Operating EBITDA grew by 6.9% to $22.2 million. Statutory net profit after tax (NPAT) jumped 30.2% to $8.1 million.

The company is looking to expand its network through both bolt-on acquisitions and the opening of greenfield/brownfield locations. It's also developing various synergies from the acquisition and opening of clinics. The ASX share is working on becoming more efficient by standardising its processes across its clinics.

According to Ord Minnett's projections, the Capitol Health share price is valued at 24 times FY22's estimated earnings with a grossed-up dividend yield of 4.3%.

The post Brokers rate these 2 top ASX shares as buys in May 2022 appeared first on The Motley Fool Australia.

Australian small caps are pushing higher in 2022 after a shaky start to the year. The large end of the market in the S&P/ASX 200 Index (ASX: XJO) has climbed 41 basis points today and sits at 7,417, having rallied 6% in the past month.

ASX small caps have followed suit and are only lagging by a small amount, also up by almost 6% during the last month of trade.

The S&P/ASX Small Ordinaries Index (ASX: XSO) spiked 2% in the past week, not enough to erase a 6% loss that investors have penalised the segment with so far in 2022.

Interestingly, with all the talk of inflation, investors can look to the smaller end of town in search of some juicy dividends at more than respectable yields. Take a look.

Small cap dividends? Please tell me more

ASX small caps have often lent investors an uncorrelated return to add into their portfolios. So hearing that some of these names also pay dividends is music to our ears.

One interesting name is Beacon Lighting Ltd (ASX: BLX). Two experts are also constructive on the stock and rate it as a buy right now. Beacon paid a fully franked 4.3 cents per share dividend in March.

Both Martin Hickson of 1851 Capital and portfolio manager at Hayborough Investment Partners, Ben Rundle, agree that Beacon is worth its weight at present.

"We think Beacon's a buy. We're going through a renovation boom at the moment that's supportive of their earnings," Hickson said during an episode of Buy Hold Sell on Livewire. Rundle agreed.

"We also think the market is underestimating the growth in their trade and international businesses. So, Beacon's a buy," he added.

Hickson also advocates to buy Capitol Health Ltd (ASX: CAJ), noting the new CEO's turnaround and a respectable valuation.

"They've [Capitol] got $100 million in firepower to deploy into acquisitions, trades on an EV/EBITDA multiple of 8x, versus private transactions being done at 12x. So, we think it's a buy," he remarked.

Meanwhile, Rundle is supportive of Money3 Corporation Ltd (ASX: MNY). He likes the company's recent earnings strength, plus its growth vision appears more visible from recent funding.

"I think it's a buy," he noted, agreeing with Hickson, who said the same thing about Money3.

"As he [Hickson] pointed out, they upgraded earnings the other day and they probably will upgrade again. They've just got more funding as well, which can support their growth plans. So, I think it's a buy," Rundle concluded.

Money3 has paid a 13 cents per share cumulative dividend since 8 April 2021.

The returns for each of these names is charted below. In that time, Beacon lighting has surged over 29%, beating the other recommendations.

The post 3 small-cap ASX shares that pay big dividends? Please tell me more appeared first on The Motley Fool Australia.

The benchmark S&P/ASX 200 index (ASX: XJO) has slipped 0.75% into the red today at 7,414 points. The S&P/ASX 200 Healthcare Index (ASX: XHJ) is leading the broad market's losses and has sunk 1.12% at the time of writing. Despite the downturn, these three ASX healthcare shares are ahead of the pack, with each posting a solid gain for the day.

Memphasys Ltd (ASX: MEM)

Shares in medical device and biotechnology company Memphasys have soared 33% in vertical fashion today and are now trading at 9.6 cents apiece.

While there is no market-sensitive information for the company today, investors have been piling into this ASX healthcare share over the past few weeks.

It appears investors are chasing a spot in the company after it announced the validation and verification assessments for its Felix device are now complete.

The Felix device will be used to remove poor quality sperm samples in in-vitro fertilisation (IVF) to ensure the highest chance of success in contraception.

Following the announcement on 3 November, Memphasys shares spiked 26%, and haven't slowed down since.

With today's gain, this marks a 51% return for the company's shareholders this past month.

Singular Health Group Ltd (ASX: SHG)

Shares in technology-driven imaging player Singular Health popped in early trading following a company announcement.

This ASX healthcare share advised that it is forming a 50/50 joint venture (JV) with TerraCentric Pty Ltd under the name of GeoVR Pty Ltd.

The sole purpose of the JV is to commercialise what Singular labels GeoVR technology, which "allows for mineral exploration data to be visualised in a fully interactive 3D environment".

The company acknowledges this is an important step in validating its technology, as it allows for collaborative review of near real-time exploration and production activities from anywhere.

Singular Health's CEO Thomas Hanly believes the GeoVR is a "critical step" for the company in pivoting its technology outside of medical markets.

Following the release, shares in the company rallied as high as 14% in early trading, before reversing course to trade as low as 29 cents – just a 1.75% gain. At the time of writing, its share price is 29.5 cents — a 5.4% gain.

Capitol Health Ltd (ASX: CAJ)

The Capitol Health share price is trading almost 8% higher at 37.2 cents at the time of writing.

Investors have been bidding up shares in the provider of diagnostic imaging services following its annual general meeting (AGM) held today.

In its AGM, the company reiterated its FY21 results, where it recorded underlying organic growth of 10.3% for the year.

Furthermore, this ASX healthcare share also provided colour on its FY22 guidance, where it hopes to retain a sustainable operating margin of 23–24%.

It also intends to continue pursuing "value creative bolt-on acquisitions aligned with [its] strategic plan", helped by carrying a strong balance sheet.

The presentation also notes that Capital intends to build out its new clinical governance framework and radiologist leadership roles.

Investors have been quick to buy in following the company's AGM. For instance, the volume of Capitol Health shares traded today is more than 25% ahead of its 4-week daily average volume.

Capitol Health shares have climbed 37% these past 12 months after rallying 34% this year to date.

The post These 3 ASX healthcare shares are soaring today. Why? appeared first on The Motley Fool Australia.

The merger and acquisition (M&A) frenzy has turned up the heat over the past few months, reaching record levels. According to Reuters, global M&A activity in the last quarter surpassed all previous records. While deals in the United States account for a large chunk of this, action in ASX shares has contributed to the surge.

In the past month alone we have seen M&A action involving Sydney Airport Holdings Pty Ltd (ASX: SYD), Milton Corporation Limited (ASX: MLT) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Hellofresh and Youfoodz Holdings Ltd (ASX: YFZ), Wesfarmers Ltd (ASX: WES) and Australian Pharmaceutical Industries Ltd (ASX: API), and many others.

With a large pipeline of M&A deals, it appears unlikely the frenzy will die down anytime soon. For that reason, we got Head of Australian Equities at TAMIM Asset Management Ron Shamgar's take on a couple of ASX shares that could be ripe for a takeover bid.

ASX diagnostic imaging share

Originally the list (here) from Ron was three. Funnily enough, the first target has now received and accepted a takeover bid. That leaves us with the remaining two ASX shares with takeover appeal.

The first is listed diagnostic imaging provider Capitol Health Ltd (ASX: CAJ). This company owns and operates 63 clinics across Victoria, South Australia, Western Australia and Tasmania. Through these clinics, Capitol Health provides essential imaging including X-ray, ultrasound, CT, and MRI.

Mr Shamgar pointed out the current state of consolidation within the sector. For example, Sonic Healthcare Limited's (ASX: SHL) recent acquisition of Canberra Imaging Group.

Additionally, fellow medical imaging provider Integral Diagnostics Ltd (ASX: IDX) currently trades on 21.6 times earnings before interest, tax, depreciation, and amortisation (EBITDA). Considering Capitol is valued at roughly 14 times EBITDA, Shamgar thinks the company makes a compelling case for acquisition.

Residential network provider

The other ASX-listed share with appealing M&A potential is Uniti Group Ltd (ASX: UWL). Uniti operates in the communications infrastructure space, providing fibre and wireless solutions.

TAMIM estimates that Uniti is winning somewhere between 25% to 30% of all new greenfield developments. Also, the company boasts a pipeline of more than 250,000 lots for fibre connection over the coming three to four years.

Another reason why Mr Shamgar finds this ASX share's proposition appealing is the defensive nature of its earnings. Providing what is, these days, considered essential infrastructure leads to recurring and long-term earnings. Uniti takes advantage of this by leveraging cheap credit offered for its predictable income streams to accelerate growth through acquisition.

Ron Shamgar commented on the company's potential:

UWL [Uniti] will benefit from a variety of emerging thematics such as 5G, IoT and data centres… With a strengthened property market, UWL will also have an opportunity to win market share from the NBN on the back of their acquisition of Opticomm, which has a big presence in the residential market.

The fund manager added that superfunds are managing such an exorbitant amount of money that they are scrambling to find appropriate places to invest it. Mr Shamgar concluded the possibility of Aware Super kicking the tyres on this ASX share in the near term.

The post 2 ASX shares this fund manager considers possible targets in the M&A frenzy appeared first on The Motley Fool Australia.

Ask A Fund Manager

In part 1 of our interview, 1851 Capital portfolio manager Martin Hickson explained why Uniti's business model is irresistible. Now in part 2, he tells us how he regrets the way his fund launched last year and the 8 stocks that lifted it out of pandemic trouble.

Overrated and underrated ASX shares

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

Martin Hickson: I don't know if it's the most underrated — we think it's underrated, it's Enero Group Ltd (ASX: EGG).

They operate a number of marketing agencies, both here in Australia, the UK and the US. It trades at a price-to-earnings ratio of sub 10 times. Their earnings are growing in excess of 30%.

The company has $50 million of net cash on the balance sheet. So, that provides them optionality to deploy into acquisitions. They've got a platform business in the UK which helps their customers deploy their online marketing budgets. It's very high margins on that business. It's called OB Media. 

We think that the valuation that Enero trades on is quite suppressed, but yet the market isn't giving them credit for that fast growing, high margin business in OB Media. And also the market is discounting the potential for them to deploy that cash. 

They made a small acquisition in the UK a month or two ago, but we think that over time, they can make further earnings, creative acquisitions as they deploy that capital. 

One of the largest shareholders has been selling down recently… So we think that the share price has been weaker due to this shareholder selling out. The price has gone from sort of $3.30 down to $2.50. We think it's very underrated, undervalued [at] where the share price currently is trading today.

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

MH: I don't really want to call a single stock out individually. But as a broad statement, I think concept stocks. 

So stocks that are trading on revenue multiples, a lot of them in the technology space, but they don't necessarily have to be. Concept stocks that aren't making money and are losing money for the next couple of years. I think that a lot of those stocks are overvalued. 

There's been a lot of risk in the last sort of 6 to 9 months. And a lot of those stocks' share prices are down 30 or 40%. They still can fall further because there's no valuation support when you're trading on a 10 times revenue multiple, [and] you're not going to have any earning for a couple of years.

If we get interest rates increasing over the coming years… that will also put pressure on a lot of these concept stocks. There are longer-duration assets, where when you're discounting the future earnings back at a higher rate, that can lead to large declines in their valuation and share prices. So, that's an area of the market that we're avoiding at the moment.

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

MH: I'll probably have to say our largest position, Uniti Group Ltd (ASX: UWL). Reason is 90% of their earnings are recurring — so there's not a lot of risk around that. They're providing data to their customers. And so they're participating in that thematic of increased data usage, demand for high speeds, and that's not going away over the next 5 years.

MF: Internet connectivity is a utility now, isn't it? 

MH: Correct. Exactly, you're right. It's a need to have. 

So, for those reasons, if the market was closed and we look at that stock again in 5 years, I think that their earnings would have been able to grow over that 5-year period and it feels like a very safe one to own.

Looking back

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.

MH: We launched the fund in early February last year. 

We'd been running a paper portfolio for 6 months leading up to that. We had a hit list of the stocks that we wanted to buy. We deployed a lot of that capital in the first couple of weeks of February, and then coronavirus accelerated in that final week of February. 

So for the first 2 months of the fund's launch, February and March, [it] was down 33% over that period. It would've been great to launch the fund at the end of March. The performance numbers on returns would look a lot better if we'd launched it then! 

Having said that though, we're still pretty happy with the performance… Over the first 15 or 16 months, the fund's up 43.5% versus S&P/ASX Small Ordinaries Index (ASX: XSO) up 13.5%. So we've been able to recover those losses and generate strong returns, post that initial selloff. So, in terms of wrong timing, that would've been nice to launch 2 months later.

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

MH: Post that sell-off, it led to some of the best buying opportunities that we've seen in a decade since coming out of the GFC. A lot of stocks were down 60%, 70% in the smaller micro-cap end of the market. 

So we found some incredible buying opportunities through that March, April, May period. To call out a couple: Eagers Automotive Ltd (ASX: APE), one of the largest automotive companies here in Australia. We initially started buying shares in AP Eagers at $3.30 back in March. Shares today are around $15. So it's performed very strongly for us. 

Capital Health Ltd (ASX: CAJ), which I mentioned earlier, we started buying it back in April last year at 18 cents. It's now 34 cents. 

People Infrastructure Ltd (ASX: PPE), we participated in a placement at $1.10 and then bought more at $1.50 in April last year. Those shares are now $4.70. 

So, there were a couple of really incredible buying opportunities that we saw coming out of that COVID sell-off. And that's what's really set up the performance that we've been able to deliver over the last 12 months — being able to buy into some high quality companies at very depressed valuations.

MF: At the time, was it nerve-wracking not knowing how we'd recover out of the pandemic?

MH: Oh, you can never be entirely certain. But when both the government here stepped in with JobKeeper and the Federal Reserve stepped in with a massive stimulus program in the US, that was a key catalyst for us. 

I remember coming out of the GFC, we had QE one, two, three [rounds of stimulus] and they were big amounts of money that were going into the financial system. As part of the COVID response in the US, the amount of stimulus that's been put into the market meets around 2.5 times QE one, two, and three combined. 

So it's an incredible amount of liquidity that's gone into the market. And so, when we saw that occurring, we believed that that was going to be a big tailwind for the market. 

The other thing that we noticed in probably late April, early May, was given the stimulus here in Australia — JobKeeper specifically, and also the ability for people to take money out of super — that was going to be very, very supportive of the retailers. We made some really good investments in some of the online retailers.

We sold a lot of them in August, September last year, but we had holdings in Adairs Ltd (ASX: ADH), Shaver Shop Group Ltd (ASX: SSG), Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN), Nick Scali Limited (ASX: NCK).

A lot of those retailers performed really, really strongly through that period… It was very clear by looking at Google Trends, as an example, you could see that the hits of today's online retailers websites were just growing at an incredible rate through that period. People were spending that stimulus money. 

Don't get me wrong, it was concerning in March — particularly for us, because we know we just launched a fund two months earlier. But as the market started to recover, we turned around and put money back in the market. 

To put some numbers around that, at the end of March, we were holding 40% of the fund in cash. So we had increased cash levels in that final week of February and first couple of weeks of March.

We were preparing for an elongated bear market. And typically bear markets go for 9 months. We were preparing for a large global recession — so we were preparing for the worst. Then we had to pivot quite quickly in April when all of that large stimulus was announced.

The post 8 ASX shares that supercharged us out of COVID-19: analyst appeared first on The Motley Fool Australia.

Ask A Fund Manager

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, 1851 Capital portfolio manager Martin Hickson tells us the telecommunications company that gets paid to build its products, then milks 40 years of recurring revenue out of it.

Investment style

The Motley Fool: Why is your fund called 1851?

Martin Hickson: Good question. 1851 was a pivotal year in Australian history. The gold rush had kicked off. Over the next decade, the population doubled. 

It was a year that things started growing, and Australia became the country that it is today, with those gold rushes. We wanted a number in the name, and it seemed as good as any number to pick.

MF: What's the fund's investment strategy?

MH: We're a small micro-cap focused fund manager. So, ex-[ASX] 100 universe, we'll invest all the way down to $50 million market cap. 

In that range, there are around 900 stocks on the ASX. We don't invest in resource companies — it's not our expertise or area of focus. And again, we don't really invest in the biotech space. Given we're not doctors, it's hard to work out whether a phase 2 or 3 trial result will be positive or negative. It's a binary outcome. 

So we focus on those industrial style companies. So if you strip out resources and biotechs, there are about 650 stocks in our investable universe. 

To describe our philosophy in a sentence, we're growth investors with a value overlay. What does that mean? It means we're looking for companies with strong earnings growth, but that are trading on attractive valuations. So to put some numbers around that, our current portfolio is trading at a 10% cheaper valuation versus the index — around 19 times price-to-earnings ratio versus the index at 21 times.

However, it has 4 times the level of earnings growth compared to the index. So that shows that we're finding those cheap companies that are growing strongly, with an event that's going to re-rate the share price. 

That's us in a nutshell. We are restricting the size of the fund. It's our belief that, particularly in the smaller micro-cap end of the market, the bigger you get, the harder it is to outperform. So we've said numerous times now that, once we reach $300 million, which we expect to occur imminently, we'll put out a final call to investors, before soft-closing the fund.

MF: How concentrated is the portfolio?

MH: We're pretty diversified. We'll hold between 30 and 80 stocks. 

At the moment we're at the upper end of that range, so around 75 stocks. We like having a diversified portfolio for 2 reasons. One, it helps with liquidity. So by having the funds, the remainder of the equity spread over a number of companies, means that liquidity is improved. It's easy to get into and out of them, as opposed to having a very concentrated portfolio. 

And also just for risk metrics, it helps us sleep at night, knowing that we haven't got 10% or 15% of the fund within one stock. The largest holding in the fund at the moment is Uniti Group Ltd (ASX: UWL) — that represents 5% of the portfolio. And the top 5 stocks at the moment are 18% or 19% of the funds under management. 

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

MH: Uniti, as I mentioned, is the largest position in the fund. It operates in the telecommunication space, run by [chief executive] Mick Simmons and [executive director] Vaughan Bowen, both ex M2 Telecommunications. They built up that business over a number of years. Mick was also at TPG in the older days — so both proven operators. 

Uniti, what do they do effectively? They're a competitor to the NBN, focused on new broad-acre housing estates. In the growth corridors of Sydney — Oran Park as an example — what they do is, they will help the developer. When the developer might have a new housing estate, where they're rolling out 5,000 new homes over a 5 to 10 year period, Uniti will lay the dark fibre to allow those homes to connect to the internet. 

They get paid by the developer to install that fibre, and then once someone moves into the home, they then sell access to that fibre to an ISP or an internet service provider, like Telstra Corporation Ltd (ASX: TLS) or iiNet. 

Effectively, they are building a recurring revenue stream, with an infrastructure-style earning stream, which will generate income for the next 30 or 40 years by selling access to that fibre. But they're also being paid by the developer to install it. So they're building long-term assets and someone else's funding that build-up for them. 

That's why we like it… We also think that there's a potential for earnings upgrades over the next couple of years, as they prove out that model. 

Definitely over time too, there's potential for Uniti to become a takeover candidate themselves. They acquired OptiComm Ltd last year — that was a competitive process. There was a large super fund, Aware Super, also vying for control of OptiComm. Uniti won out.

More recently, we've seen Vocus Group Ltd (ASX: VOC) get taken over by Macquarie Group Ltd (ASX: MQG). So we get that there is corporate appeal in this space. 90% of [Uniti's] earnings are recurring — so high-quality renewable stream — and that's why it's recently into the ASX 200 as well. 

MF: What's the second-biggest holding?

MH: Second largest is Capitol Health Ltd (ASX: CAJ). They're a radiology company, Victorian-focused — 80% of their revenue comes from Victoria. 

New CEO, Justin Walters, joined around 18 months ago. He's taken costs out of the business, made the business more efficient. We're also going through a period where they've delivered strong revenue growth despite the lockdown in Victoria. So they've got positive draws, costs have come down, revenue's gone up, that's led to a large increase in their profit margins… They've got a very strong balance sheet and a very minimal amount of debt. So that provides them with a capacity to make creative acquisitions. 

The company trades on EV-to-EBITDA multiple of 9 times. The largest peer, which is Integral Diagnostics Ltd (ASX: IDX), trades on 11 times. And then there's been private takeovers or transactions done at 13 times. Capitol is trading at a significant discount to those private transactions on IDX. 

So we think it's very, very cheap. Again, we think that over time it could become a potential candidate for one of these private companies, given that it's trading on such a depressed multiple. 

Do these shares tempt you? 

MF: These are the 5 most-searched shares at the moment. Would you buy or ignore each of these? MoneyMe Ltd (ASX: MME), Cettire Ltd (ASX: CTT), Nuix Limited (ASX: NXL), iSentia Group Ltd (ASX: ISD), Patrys Limited (ASX: PAB)?

MH: To be honest, we don't own any of them… We would ignore [all five]. 

I mean, putting them all in the one basket, all of those stocks trade on quite high multiples. Some of them don't make earnings at all. And those that do, are trading on significant revenue multiples. So, none of them meet our investment criteria. 

iSentia obviously received a takeover a bit earlier in the week. We don't own it. We wouldn't buy it… It's not part of our investment philosophy. We don't do takeover arbitrages.

Basically, we like investing in companies that are profitable, or have a very clear path to being profitable in the short term.

Tomorrow in part 2 of our interview, Hickson reveals the ASX shares that revved up his portfolio after the COVID-19 crash.

The post Why we avoid mining and biotech ASX shares: fund manager appeared first on The Motley Fool Australia.

There are a few top-performing small cap ASX shares that delivered strong performance in March 2021 that helped the 1851 Emerging Companies Fund outperform its benchmark.

What's 1851 Emerging Companies Fund?

It's a fund that invests on small cap companies outside of the S&P/ASX 100 Index (ASX: XTO). The 1851 Capital fund typically invests in 30 to 80 small cap ASX shares to try to beat the S&P/ASX Small Ordinaries Accumulation Index.

1851 Emerging Companies Fund has been a very strong performing fund since inception after it launched just before the COVID-19 crash. Since inception in February 2020, the fund has delivered a net investment performance per annum of 28.6%. That's after all fees and expenses. Over the last year, to 31 March 2021, its net return was 100%.

At the end of March 2021, the five largest positions were Uniti Group Ltd (ASX: UWL), Capitol Health Ltd (ASX: CAJ), Frontier Digital Ventures Ltd (ASX: FDV), PSC Insurance Group Ltd (ASX: PSI) and Pinnacle Investment Management Group Ltd (ASX: PNI).

The fund's net return of 1.1% in March 2021 was able to beat its benchmark's return of 0.8%, partly thanks to these three shares:

Eureka Group Holdings Ltd (ASX: EGH)

The Eureka share price climbed 21% in March 2021. 1851 Capital explained that the business continued its rally after a strong result in February 2021.

In the result, the small cap ASX share reminded investors that its revenue streams are economically stable and highly resilient, with government pensions underpinning around 95% of revenue. It has 97% occupancy.

Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) went up 27% to $5.23 million, underlying profit before tax grew 39% to $3.57 million and net operating cashflow increased 16% to $4.05 million.  

1851's investment team are impressed with the ASX share's new board and management at the company who have sent an "impressive" platform for growth in the senior independent living sector.

People Infrastructure Ltd (ASX: PPE)

The People Infrastructure share price went up 18% last month. 1851 Capital attributed this rise to the "solid" result and return of the former CEO.

The small cap ASX share saw revenue growth of 3.1% to $201 million and normalised EBITDA rose 49.3% to $21 million. Normalised net profit after tax and before amortisation (NPATA) grew 51.5% to $13.7 million and NPATA per share grew 19% to 14.8 cents.

People Infrastructure is expecting to grow its normalised EBITDA to between $35 million to $37 million in FY21.

The business continues to look at both the opportunity to grow organically into new sectors as well use its acquisitions that would accelerate that growth.

Pentanet Ltd (ASX: 5GG)

Perth-based telecommunications business Pentanet saw its share price increase 20% over the month. 1851 Capital pointed to strong subscriber growth and optimism around the cloud gaming launch.

On 27 January 2021, the small cap ASX share commenced online registrations of interest by allowing future Australian users of GeForce NOW to reserve their usernames and register for an invitation to the beta program.

Since that announcement, over 24,300 gamers have registered. This level surpassed initial business case expectations and provided strong confidence to scale up its initial launch plans.

Pentanet has proceeded with the placement of an initial hardware order with NVIDIA in line with the cloud gaming strategy. It is buying 18 RTX game servers at an approximate capital cost of A$3.2 million. The aim is to roll out the beta offering this year, with a commercial to launch after that.

The post 3 top ASX small cap shares that delivered for this fund's portfolio appeared first on The Motley Fool Australia.

Respected fund manager Wilson Asset Management (WAM) has recently identified two ASX shares that it owns in its portfolio.

WAM operates several listed investment companies (LICs). Two of those LICs are WAM Capital Limited (ASX: WAM) and WAM Leaders Ltd (ASX: WLE).

There's also one called WAM Active Limited (ASX: WAA) which looks at businesses it thinks are the most undervalued.  

WAM says WAM Active invests in market mispricing opportunities in the Australian market.  

The WAM Active portfolio has delivered gross returns (that's before fees, expenses and taxes) of 12.1% per annum since inception in January 2008, which is superior to the Bloomberg AusBond Bank Bill Index return per annum of 3%.  

These are the two ASX shares that WAM outlined in its most recent monthly update:

Capitol Health Ltd (ASX: CAJ)

WAM explained that Capitol Health operates 63 community-based diagnostic imaging clinics, employing more than 800 staff and delivering more than 1.2 million procedures every year.

The healthcare business beat market expectations with its FY21 half-year result where revenue grew by 5.9% to $85.3 million. Operating earnings before interest, tax, depreciation and amortisation (EBITDA) rose 50.1% to $26.6 million.

Capitol Health also reported that its operating profit margin was 31.1%, up from 22% in the prior corresponding period. Statutory net profit after tax (NPAT) was $6.2 million – an increase of 131.6% year on year. The interim dividend was maintained at 0.5 cents per share.

WAM was pleased by the fact that the ASX share delivered "robust organic growth" despite having the majority of its business closed during the Melbourne lockdowns. Earnings benefited from a close control on costs.

The fund manager said that a broader rebound in industry demand is a catalyst for future earnings growth, while a stronger balance sheet allows Capital Health to execute earnings accretive acquisitions.  

Virgin Money UK CDI (ASX: VUK)

Virgin Money UK is one of the larger banks in the UK, after a merger between CYBG (Clydesdale and Yorkshire Banking Group) and Virgin Money UK. The aim was to gain enough scale to seriously challenge big banks like Barclays and HSBC.

It has a presence on the ASX because CYBG was spun out of National Australia Bank Ltd (ASX: NAB) a few years ago and retained a presence on the ASX.

Virgin Money has 6.4 million customers, which the company helps through its online personal, mortgage and business banking services.

Last month, the UK bank said that it was making a good start to the year with its continued roll-out of its rebranding programme, a return to making a profit in statutory terms and high levels of customer deposits – the quarter ending 31 December 2020 showed growth of 0.9%.

WAM pointed out that Virgin Money's level of active payment holidays declined across the portfolio. This is like how Australian borrowers were able to get deferrals on their loans from banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and NAB due to the impacts of the pandemic on their finances.

The fund manager is positive about Virgin Money UK's outlook because the UK's vaccination program and helpful fiscal and monetary policies that may support the company's rebound from the COVID-19 pandemic.

The post 2 top ASX shares to buy according to WAM appeared first on The Motley Fool Australia.

The market jumped to a three-month high on a quicker than expected recovery from the COVID-19 pandemic.

The S&P/ASX 200 Index (Index:^AXJO) jumped 2.4% to 6,145 points as we head into the close as a sense of FOMO gripped the market.

I don't subscribe to using the fear of missing out as an investment strategy and I think investors will need to be more discerning about stocks to buy.

While some stocks look like they have run ahead of fundamentals, there are a handful that's only just been upgraded by brokers to "buy".

This stock's a steel

One ASX stock that just got bumped up to "buy" by Goldman Sachs is BlueScope Steel Limited (ASX: BSL).

This probably explains the 3.8% jump in the BlueScope share price to $12.84 at the time of writing.

"Steel spreads in both Asia and North America have bounced off floor levels, and we expect improvement over the coming months and a return to levels more consistent with more balanced supply/demand environments," said the broker.

"This is to be supported by positive reversion of volumes across the core markets, in particular in Australia where our channel checks suggest that demand has been a lot more supportive than previously expected.

What's more, Goldman thinks the good times will roll on for the next 12-months thanks to additional government stimulus.

The broker lifted its price target on BlueScope to $14.95 from $10.25 a share.

Right kind of exposure

Another ASX stock that is outperforming today is the Worley Ltd (ASX: WOR) share price.

Shares in the oil and gas engineering group surged 14.3% to $10.63 to become the second top performer on the ASX 200 in late afternoon trade.

The stock was underperforming due to the slump in the oil price but Credit Suisse believes its oversold and upgraded it to "outperform" from "neutral".

The broker also pointed out that Worley is more exposed to operational projects than the more volatile capital projects.

However, Worley's big price gain today may limit further upside as Credit Suisse's 12-month price target on the stock is $10.50 a share.

Good medicine

Defensive stocks like healthcare may have fallen out of favour in the rebounding bull market, but the Healius Ltd (ASX: HLS) share price is bucking the trend.

Shares in the medical facilities group rallied 3.2% to $2.62 after Macquarie Group Ltd (ASX: MQG) lifted its rating on the stock to "outpeform" from "neutral".

While the coronavirus shutdown led to a drop in face-to-face appointments at Healius' general practitioners (GP) offices, the broker said this is more than offset by telehealth services.

Further, comments from diagnostic services group Capitol Health Ltd (ASX: CAJ) about increase demand for its services from GP referrals support this upbeat prognosis.

Macquarie's 12-month price target on the stock is $3 a share.

The post Top brokers just upgraded these 3 ASX stocks to "buy" appeared first on The Motley Fool Australia.

The rally I am talking about isn't political in nature but the share market kind. The Integral Diagnostics Ltd (ASX: IDX) share price surged 6.8% to $2.66 ahead of the market close, while the Capitol Health Ltd (ASX: CAJ) share price and Paragon Care Ltd. (ASX: PGC) share price have jumped over 4% each.

The outperformance of this group stands in contrast to the 0.6% drop in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

The $2.3 billion boost for the sector

Prime Minister-in-waiting Shorten is promising to spend $2.3 billion on cancer detection and treatment if the Labor party wins the upcoming federal elections, according to the Australian Financial Review.

Shorten is calling the cash injection the most important Medicare investment since the universal healthcare initiative was launched in 1984.

The move will be welcomed by all Australians, I suspect, given that nearly everyone has been affected by cancer or knows of someone who have suffered because of cancer.

The cash pledge will mean that six million Australians won't have to pay anything (or very little) for cancer scans, including MRIs, over the next four years; while three million specialist doctor appointments will also be covered.

Shorten is also promising that every cancer drug recommended by experts will be subsidised by the PBS – meaning that patients on these drugs won't be sent to the poor house.

The small cap stocks that benefit the most

Integral Diagnostics and Capital Health run diagnostic imaging facilities across the country. Paragon Care sells medical equipment, including diagnostic machines.

Integral Diagnostics CEO Dr Ian Kadish told the AFR that Medicare has been slow to recognise MRI as an essential service with the number of MRIs done in Australia running at half the rate of those in Europe and New Zealand.

If Shorten's pledge to cancer treatment is as popular as I think it will be, the federal government could find itself under pressure to offer something similar.

That will be good news for these companies and the estimated 145,000 Australians who are diagnosed with the disease each year.

But these aren't the only medical related stocks with a bright outlook. The experts at the Motley Fool have another that they think investors should be keeping an eye on.

Click on the free link below to find out what this stock is.

The post The ASX small cap stocks enjoying a Bill Shorten boost appeared first on The Motley Fool Australia.

Will the ASX be able to bounce back on Wednesday? Here are five things to watch:

ASX futures pointing higher.

The Australian market is expected to open the day higher on Wednesday. The latest SPI futures are pointing to the market opening 0.1% or 6 points higher despite a reasonably disappointing night of trade on Wall Street. The Dow Jones fell 0.25% and the S&P 500 was down 0.1%. Things were more positive for the Nasdaq, which closed almost 0.2% higher.

Oil prices remain positive.

Australia's leading energy producers could continue their positive run after oil prices remained favourable overnight. According to Bloomberg, the WTI crude oil price was flat at US$72.08 a barrel and the Brent crude oil price rose a further 0.5% to US$81.62 a barrel.

Nufarm results.

This morning Nufarm Limited (ASX: NUF) is scheduled to release its full year results. According to a note out of Goldman Sachs, it is expecting the crop protection and specialist seeds company to post a net profit after tax of $111.4 million, down 18.1% on the prior period. The main drag on its performance is expected to come from its ANZ business due to the droughts. ANZ EBIT is expected to be between $5 million and $10 million, versus $51.6 million in prior periods.

Shares going ex-dividend.

A number of shares are going ex-dividend today and are likely to trade lower. These include health supplements company Blackmores Limited (ASX: BKL), imaging services provider Capitol Health Ltd (ASX: CAJ), and property developer Cedar Woods Properties Limited (ASX: CWP).

FOMC meeting.

Tonight the U.S. Federal Reserve will meet to make a decision on interest rates. According to CME Group's Fedwatch Tool, the market has priced in a 94.4% probability that rates will rise to the 2% to 2.25% range. While I believe this has already been priced into the Australian dollar, any extra hawkish comments from the Fed could hit the Aussie and send it lower.

The post 5 things to watch on the ASX on Wednesday appeared first on The Motley Fool Australia.

These three emerging healthcare shares are also worth keeping your eye on.

Here's why.

Clover Corporation Limited (ASX: CLV)

With a market cap of just $272.5 million it's early days for this small cap stock – involved in the refining and sale of omega-3 oils for infant formula, children's food, supplements and medical foods.

But if the boom of the infant formula market for players like Bellamy's Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M) is anything to go by this niche could prove profitable for Clover – which has seen a share price surge of 256% in the last 12 months, up from 46c per share at this time last year to $1.64 today.

It's hard to ignore such gains and Ord Minnett placed a buy rating on the stock back in May with a price target of $1.40 – which has already been exceed by 17%.

Ord Minnett has forecast EPS out of Clover to grow at a compound annual growth rate (CAGR) of 28% between FY18 and FY21.

Not only is the Asian market a potential stamping ground for Clover in the future, but changing regulations in Europe could mean Clover finds itself relevant in that region too.

Looks like the potential for growth is pretty astronomical – one to watch.

Pacific Smiles Group Ltd (ASX: PSQ)

Shares in dental centre operator Pacific Smiles Group Ltd are down 5.7% to $1.65 at the time of writing after a trading update was released today.

Pacific announced its underlying EBITDA growth would now be between 2% and 4% – a downgrade from 10% in previous guidance – which may have shaken investors today as the weaker-than-expected top line performance comes as a surprise.

But with 10 new centre openings in the pipeline and patient fee growth of 11% Pacific looks to have a fairly strong growth strategy in place, with strong EBITDA growth estimated for FY19 and the long term target of opening 250 dental centres in Australia on track.

I still think Pacific has a bright future, and the uptake of new dental centres should ramp up earnings next year.

Capitol Health Ltd (ASX: CAJ)

Shares in diagnostic imaging services company Capitol Health remain steady at 32c per share, with little reaction from the market on the announcement yesterday it would acquire 9 independent radiology clinics in Western Australia.

Capitol's market update in early June indicated it was on track to reach EBITDA guidance of between $23 million and $25 million, with its doctor's incentive scheme also a unique play – with the issue of unlisted options over ordinary shares at a 10% premium to the 30-day-trading volume.

Capitol shares might be stagnant right now, but they've experienced a short surge throughout May and June – up from 28c on May 21 to a 52-week high of 34c on June 20.

Capitol is somewhat under the radar, but its strategy to continue to acquire radiology clinics across Australia could see it log some decent growth in the medium term.

One to watch as these businesses begin to turn profit for the company.

The post These 3 emerging healthcare shares could be the next big thing appeared first on The Motley Fool Australia.

The move comes after Capitol Health provided a market update earlier this month, indicating its EBITDA earnings guidance of between $23 million and $25 million was on track.

Capitol Health has also introduced a doctor equity incentive scheme, with the issue of unlisted options over ordinary Capitol Health shares at a 10% premium to the 30-trading-day volume.

Capitol has indicated more acquisitions are on the cards, with the strategy clearly focused on asset growth as it works to expand itself in the competitive healthcare space.

Elsewhere in the sector today all eyes are on global hospital group Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), with its share price down almost 30% in the last 12-months after slowing growth has forced the company to rethink its strategy.

Healthscope Ltd (ASX: HSO) shares are down slightly today to $2.19 today as it remains a takeover target.

The post Why Capitol Health Ltd (ASX:CAJ) is an under-the-radar healthcare stock to watch appeared first on The Motley Fool Australia.

Integral Diagnostics confirmed its guidance for FY18. Normalised net profit after tax is expected to grow 20% from the $15 million reported in the previous year, with EBITDA in the range of $38 million to $39 million.

In February, the company rejected a $312 million scrip bid from rival Capitol Health Ltd (ASX: CAJ). Since then, the Integral Diagnostics share price has gained 30%, and now the current market capitalisation of the company amounts to $411 million.

Integral Diagnostics has transformed from being a takeover target to making acquisitions. A few days ago, the company announced the purchase of three radiology practices in Auckland for $98 million. Today it's the turn of Victoria-based Geelong Medical Imaging, for $5 million.

The transactions had an expected FY19 EBITDA contribution of between $13 million and $14 million, and will increase the company's presence in Australia and New Zealand to 53 radiology clinics, including 13 hospital sites.

Based on the company's forecast, the stock trades at 22x FY18 earnings.

The post Integral Diagnostics Ltd (ASX:IDX) announces profit upgrade and new acquisitions appeared first on The Motley Fool Australia.

Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) in the same sector, is a global hospital group and is trading on forward PER of 23x. The share price has fallen 9% in a year, not helped by former CEO Chris Rex selling $27.2 million of shares as reported in the Australian Financial Review, as well as the CFO selling $12.5 million over 2017. The relatively new CEO, Craig McNally, has also sold shares in the previous few weeks to the sum of $4.8 million or 18% of his total holding, which cannot be good news for the company.

The post Why are Capitol Health Ltd shares up strongly today? appeared first on The Motley Fool Australia.

What passes as an ethical company for one investor may not be the same for another investor. Ethical investment funds often have holdings in companies such as banks due to their ability to promote positive change.

It depends how you interpret what is ethical but at the moment with the royal commission, it is difficult to put any of the big four banks in that category. Other ethical funds will steer clear of anything that is remotely outside their Environmental, Social and Corporate Governance (ESG) mandate. 

Many companies that do meet ESG standards seem to fall outside the large cap companies. Here are a few companies to put on your watch list or buy now for a long-term investment: 

Seek Limited (ASX: SEK), a mid cap stock, is involved in the recruitment industry locally and internationally. 1H18 adjusted net profit was up over 20% on 1H17. The share price has performed well, up 15.5% in one year reaching a high of $21 in March, now trading at $19.35. The forward PE ratio is on the high side at 32.2 but I think it offers a long-term investment opportunity (see Fool.com.au). 

Iress Ltd (ASX: IRE), a mid cap stock, is a financial servcies business. It reported a lower profit result due to higher costs attributed by the company to acquired businesses, an increase in recruitment and higher wages. Trading on a forward PE ratio of 27.4 based on forecast earnings growth of 20%, the company is not inexpensive but is worth watching for future price dips before buying. 

Capitol Heath Ltd (ASX: CAJ) provides facilities and diagnostic imaging services to the Australian healthcare market. It is a small cap with a market cap of $230 million. The share price is up 73% for the year to $0.34 cents, trading on a forward PER of 33x. As mentioned in Fool.com.au recently the company has been re-rated by Credit Suisse and may be ready for another upward run. 

The post 3 shares I like for ethical investors appeared first on The Motley Fool Australia.