The S&P/ASX 200 Index (ASX: XJO) has been unstoppable these past two years, but there are still some cheap ASX shares available.
Emma Fisher of Airlie Funds Management highlights some of these potentially cheap companies in a recent note.
The fund manager explained that Airlie started positions in each name toward the end of last year. These include:
Each of these businesses have "strong balance sheets and good management", and are positioned to generate solid returns according to the fundie. Let's take a look.
In a sea of green, you'd be forgiven for thinking cheap ASX shares are a dime a dozen. But Fisher explains that Airlie Funds is looking for companies with strong financial characteristics and "somewhat beaten up" valuations.
Noting that times have changed since the "all-time highs" of December 2021, Fisher adds that market returns these past two years haven't been driven by growth in corporate profits or dividends.
Instead, it has been due to a "change in the price/earnings (P/E) multiple", which is a guide to the market's "psychology", Fisher says.
So, whilst markets are running hot, Fisher says many sections also appear overvalued.
If we take that starting point of July 2022, the S&P/ASX 200 has gone on to return 38% inclusive of dividends, an impressive return over two-and-a-half years…
…the bulk of the 38% index return generated in the last two-and-a-half years has come from the P/E re-rating rather than earnings growth. In fact, over the last two years, earnings have declined 11%, while the P/E has re-rated by 27%.
Whether or not this is sustainable is anyone's guess, albeit I would speculate that actual earnings growth is going to be needed for further returns from here.
If we do get a rate cut or two in 2025, such earnings growth should be achievable, although it is interesting that our market has rerated over 2024 in line with the US, which enjoyed 100 basis points of rate cuts over the year, despite the lack of falling interest rates in our own economy.
As a result, the fundie explains that Airlie is "tilting" its portfolio toward companies that have "depressed, rather than elevated, expectations" in the market. In other words, cheap ASX shares.
That means opportunities where P/E ratios aren't too inflated, but the business' prospects are strong over the long term.
The broad market might be a little distorted right now. But this hasn't deterred Airlie Funds from keeping its long-term view, aiming to buy cheap ASX shares with solid financials.
Fisher says the firm has allocated its precious capital towards businesses where the "expectations are muted".
A number of these investments are positions we established in 2024: BlueScope, IDP Education, IGO, The Lottery Corporation…
…Others are positions we've added to as share prices have fallen: Ampol on weak refining margins and production issues, BHP as Chinese stimulus disappoints, CSL as the Vifor acquisition has fallen short of expectations.
Fisher says the difference between these names simply being cheap ASX stocks and high-quality businesses at a discount is in their fundamentals.
Part of this stems from their balance sheets, and part from their ability to generate strong business returns.
What these businesses have in common are strong balance sheets and good management teams, as well as the ability to generate good returns through the cycle.
In an expensive market, we believe positioning the portfolio towards businesses with strong financial characteristics and somewhat "beaten up" valuations should prove a good starting point for decent long-term returns.
An 'expensive' market can be daunting. Plus, the ASX continues to extend its gains in 2025. So, is it a bad time to invest?
"Not necessarily", Fisher explains. "It is We are big believers in the age-old saying, "It's time in the market, not timing the market" that drives long-term wealth creation in investing in equities."
These companies are all deemed to be cheap ASX shares by Airlie Funds Management.
Furthermore, Fisher's comments resonate with any investor with a long-term horizon, where the performance of the business is crucial, along with starting valuations.
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