How and where can an ASX investor make money in a dysfunctional share market?

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It can be pretty tough seeing the ASX share market go significantly into the red over a short period of time. How are investors meant to make money when things get rough?

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”.



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