Investment success over the long-term means finding great companies that are trading at attractive valuations.

When buying shares, it is more than just buying a name on a screen. Rather, they’re buying partial ownership in companies. As such, we think it’s important to understand a company’s fundamentals before purchasing its shares.

This approach can help you no matter what your goal or selection criteria is, by helping you look beyond potential noise caused by short-term factors and hype, and find quality shares to invest in long-term.

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It boils down to four basics:

  1. Having an intimate knowledge of the company’s sustainable competitive advantages or moat
  2. Determining what its shares are worth
  3. Understanding the inherent risk in the business as represented by the uncertainty rating
  4. Only buying the stock when there’s a significant margin of safety in doing so

For more information listen to our 3-part series on finding great shares on our podcast Investing Compass.

There have been large moves in some share prices during earnings season and as a result, we’ve made quite a few changes to our best ideas list. Overall, with the market at record highs, we are no longer are awash with cheap options. The market is slightly overvalued with the median price / fair value for our coverage at 1.06, a 6% premium to our fair value.  

Top shares in each ASX sector

Here’s our top picks for each sector.

  • Basic materials: Nufarm (NUF)
  • Communications: Spark (SPK)
  • Consumer cyclical: Kogan (KGN)
  • Consumer defensive: A2 Milk Company (A2M)
  • Energy: Santos (STO)
  • Financial services: AUB Group (AUB)
  • Healthcare: Ramsey Health Care (RHC)
  • Industrials: Auckland International Airport (AIA)
  • Real estate: Dexus (DXS)
  • Technology: Audinate (AD8)
  • Utilities: APA Group (APA)

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Nufarm - Basic Materials

  • Star rating: ★★★★★
  • Fair Value: $7.70
  • Uncertainty: High
  • Economic moat: None

Nufarm is a major producer of crop-protection products including herbicides, fungicides, and pesticides, selling into all major world markets. The company is leveraged to growing demand for crops for biofuels, and food from rapidly industrializing markets such as China and India. Growth should come from astute brand and offshore business investments and from a customer service-focused strategy. However, the global crop-protection markets are competitive and earnings are cyclical, given a reliance on seasonal conditions. Sumitomo Chemical's investment in Nufarm endorses the quality of its global distribution. Collaboration broadens product portfolios and adds distribution in Asia.

Continued growth in food demand in industrializing nations should underwrite long-term earnings growth. Nufarm's primary competitive strengths are marketing scale, dominant position in the Australian market, formulation expertise, and skills in marketing post-patent crop-protection product. Global expansion in recent years reduced dependency on the domestic market. The company's dominance in Australia has become less certain, with glyphosate pricing coming under considerable pressure. Due to the competitive nature of its markets, lack of pricing power and exposure to cyclical agricultural demand, we do not think Nufarm possesses an economic moat. Returns on invested capital have historically failed to meet the cost of capital.

In addition to its crop-protection business, Nufarm has a seed technologies business. With this, it aims to broaden its portfolio of products, all of which are targeted to improve agricultural yields. Nufarm has a growing presence in North America and Europe. Sound sales momentum has been evident in North America and Europe. Several Chinese companies have previously expressed interest in acquiring Nufarm, but withdrew either because of too high a price demanded by the board, or because of reduced availability of debt. In 2010, Japanese company Sumitomo Chemical bought 20% of Nufarm, subsequently increasing its stake to 23% before diluting to 16% and then selling out completely in 2022.

Spark - Communications 

  • Star rating: ★★★★★
  • Fair Value: $4.60
  • Uncertainty: Medium 
  • Economic moat: Narrow 

Spark is one of only three integrated telecommunications entities in New Zealand. It is the leading mobile network operator with low- to mid-40% subscriber and revenue share, and the dominant provider of fixed-line broadband services with a mid-30% subscriber share. It has a commanding presence in the New Zealand corporate and wholesale telecommunications services provision space.

Spark supplements its core telecommunications operations and related infrastructure with IT products and services across cloud, managed data and networks, procurement, data centers, and Internet of Things. Its operations are entirely based in New Zealand, except for its 41% interest in Southern Cross Submarine Cables, which has zero book value and to which Spark has no funding obligations.

Spark New Zealand generates steady cash flow, has a strong position in the New Zealand telecommunications industry, and has the infrastructure to offer a diverse range of products. Although competition is intense in the New Zealand market, we believe Spark's scale provides a competitive advantage. Furthermore, private equity ownership of Vodafone New Zealand has heralded in a new age of rational competitive behavior in mobile. Construction of an ultrafast broadband network has lowered barriers to entry in fixed-line and broadband, and represents a risk to Spark's broadband business. Successful execution of product bundling that leverages the mobile network could help defend broadband market share, as will continuing growth in fixed wireless broadband.

Spark's moat is supported by cost advantage and economies of scale in a relatively small market. Spark is the equal-largest player in mobile with over 40% service revenue market share. The dominant market positions of Spark and Vodafone may make it difficult for new players to enter the market and establish necessary scale.

Kogan - Consumer Cyclical 

  • Star rating: ★★★★★
  • Fair Value: $10.70
  • Uncertainty: Very high 
  • Economic moat: None

Kogan.com is an Australian pure-play online retailer. The firm primarily caters to value-driven consumers through its private label products, spanning multiple categories including consumer electronics, furniture, and fitness. For brand-conscious consumers, Kogan also offers a wide range of products from well-known third-party brands such as Apple, Samsung, and Google. 

Fiscal 2024 was marked by a significant improvement in the online retailer's profit metrics, with adjusted earnings before interest, taxes, depreciation and amortisation (“EBITDA”) margins as a percentage of revenue rising to 9%. This is well ahead of the low point of 1% in fiscal 2023 and above prepandemic margins of 7% in fiscal 2019. We forecast EBITDA margins to gradually expand to durable levels of around 18% by fiscal 2027, with the higher-margin platform and verticals businesses expanding and fixed costs fractionalizing over a greater sales base.

Sales momentum and profit margins are still improving. In July 2024, gross sales increased by 2% compared with the PCP. We believe group sales growth in the Australian business is higher than average, held back by a cyclically weak New Zealand consumer. For instance, Australian gross sales had increased by 2% in the June 2024 quarter, while sales in New Zealand dropped 13%. We think this momentum is carrying into early fiscal 2025. Nevertheless, we anticipate the overall macroeconomic backdrop to improve for retailers in Kogan’s core Australian market in fiscal 2025, driving group gross sales to increase by 6% to $857 million.

We temper our near-term outlook, with our previous very optimistic expectations looking unrealistic against recent operating performance. But we still expect the margin to expand materially in fiscal 2025. We maintain our fair value estimate of $10.70, with our lower near-term net profit after tax (“NPAT”) estimates offset by the time value of money.

A2 Milk Company - Consumer Defensive 

  • Star rating: ★★★★
  • Fair Value: $7.20
  • Uncertainty: High 
  • Economic moat: Narrow

A2 Milk has built a brand that we expect to protect economic profits for years to come. China is the key battleground. A2's future growth relies heavily on further successful penetration of the Chinese infant formula market, which we estimate makes up the vast majority of earnings.

A2 is a licensor and marketer of fresh milk, infant formula, and other dairy products that lack the A1 beta-casein protein. Dairy cows naturally produce two beta-casein proteins in their milk: A1 and A2, which differ by one amino acid. A2 milk is produced by cows that naturally produce milk only containing the A2 protein; genetic testing is done to build herds of supply. Some studies have suggested the A1 protein may be associated with serious health issues, although a2 Milk only asserts that milk with only the A2 protein may positively affect digestive function.

A2’s fiscal 2024 result itself was strong with underlying net profit up 8% to NZD 234 million—about 4% ahead of our prior forecast. Its share of the crucial Chinese infant formula market is also climbing and already healthy brand metrics continue to improve. Consumers are willing to pay up for the a2 brand, in fresh milk in Australia and infant formula in China. This pricing power has afforded market share growth despite difficult conditions—underpinning the firm’s narrow economic moat. But we think the market was overly concerned about a weaker near-term outlook statement. Temporary, operational supply constraints—ostensibly with manufacturing partner Synlait—are set to weigh on sales in the first half of fiscal 2025 and gross margins are set to suffer amid a short-term reliance on air freight. The supply constraints are transient, likely abating by the end of the first half of fiscal 2025. We think the share price fall presents an attractive entry point for investors.

The company expects mid-single-digit revenue growth in fiscal 2025, compared with our prior 9% growth forecast. Given gross margin freight headwinds, management also guides to roughly flat EBITDA margins. We lower our fiscal 2025 net profit forecast by 12% to $178 million—representing about 6% growth on fiscal 2025. We also lower our fiscal 2026 net profit forecast by about 4%, principally as Matura Valley Milk appears set to break-even about a year later than previously expected. Our fiscal 2027 net profit forecast is unchanged. We maintain our NZD 8.00 fair value estimate. We modestly lower our valuation for Australian-listed shares by 3% to $7.20 on currency movements.

Santos - Energy

  • Star rating: ★★★★★
  • Fair Value: $12.50
  • Uncertainty: High 
  • Economic moat: None

Santos is the second-largest Australian pure oil and gas exploration and production company (behind Woodside Petroleum, ASX:WPL), with interests in all Australian hydrocarbon provinces, Indonesia, and Papua New Guinea. Well-timed East Australian coal seam gas purchases and subsequent partial sell-downs bolstered the balance sheet and set the scene for liquid natural gas, or LNG, exports. Santos is now one of Australia's largest coal seam gas producers and continues to prove additional reserves. It is the country's largest domestic gas supplier.

Coal seam gas purchases increased reserves, and partial sell-downs generated cash profits, putting Santos on solid ground to improve performance. Group proven and probable, or 2P, reserves doubled to 1,400 million barrels of oil equivalent, primarily East Australian coal seam gas. Coal seam gas has grown to represent more than 40% of group 2P reserves, despite partial equity sell-downs.

A degree of confidence can be drawn from project partners. US energy supermajor ExxonMobil, the world's largest publicly traded oil and gas company, is 42% owner and the operator of the PNG LNG project. The Gladstone LNG project was built and is operated by GLNG Operations, a joint venture of owners Santos (30%), Petronas (27.5%), Total (27.5%), and Kogas (15%). Petronas is Malaysia's national oil and gas company and the world's second-largest LNG exporter. French energy major Total is the world's fifth-largest publicly traded oil and gas company, and Korea's Kogas is the world's largest buyer of LNG. Santos is in good company.

Our $12.50 fair value estimate assumes a pullback in Brent crude price to a midcycle USD 60 per barrel by 2026 versus current levels nearer USD 80. This, regardless, supports a healthy 12% 10-year EPS CAGR to USD 1.35, or AUD 2.08, by 2033. We still forecast 10-year EBITDA compounded annual grow rate (“CAGR”) of 5.7% to USD 6.6 billion and a midcycle EBITDA margin of 80% excluding third-party sales. That margin would be an improvement on first-half 2024’s 73%, but is in line with the 80% 3-year average to 2023. We expect new projects including Barossa and Pikka to be lower cost, and first-half 2024 unit production costs were higher due to maintenance activities and extreme weather. At around AUD 7.60, Santos remains materially undervalued in 4-star territory.

AUB Group - Financial Services

  • Star rating: ★★★★
  • Fair Value: $34.00 
  • Uncertainty: Medium
  • Economic moat: Narrow

AUB Group operates the second-largest general insurance broker network in Australia and New Zealand. AUB brokers derive revenue from commissions paid by insurers, based on gross written premiums. AUB owns or has equity stakes in each broking business within the network. Around half of group profit is delivered by the Australian and New Zealand broker network, around 30% from Tysers in the United Kingdom, and the remainder from underwriting agencies.

A key value proposition over smaller brokers is AUB’s ability to negotiate more favorable policy wording and pricing. Scale also provides the capacity to spend more on technology, which helps facilitate greater analytical and processing capabilities, and marketing to help attract and retain customers. Other services such as claims support and premium funding support the value proposition.

AUB Group’s underwriting agencies distribute insurance products but take no underwriting risk. Underwriting agencies act on behalf of insurers to design, develop, and provide specialized insurance products and services.

The earnings outlook is positive. We expect further insurance price rises over the medium term, albeit not at double-digit levels recently experienced, as insurers seek to cover claims inflation and higher reinsurance costs.

We expect insurance brokers to take share of the intermediated market. Technology should allow a greater number of policies per client—for example, adding personal motor/home on top of a business client's insurance needs. AUB’s investment in BizCover, a self-service insurance platform targeting small SMEs, and partnership with accounting firm Kelly+Partners to act as a lead generator should see AUB take share of the small SME end of the market. This share will most likely come from the direct channel.

Ramsy Health Care - Healthcare

  • Star rating: ★★★★★
  • Fair Value: $62
  • Uncertainty: Medium 
  • Economic moat: Narrow

We decrease our midcycle earnings before interest and taxes (“EBIT”) margin forecast by roughly 50 basis points to 10%, with wage inflation having more of an impact than previously assumed. The UK government for instance has delivered a 10% increase to the minimum wage. We have also cut our revenue forecasts by an average 2% over the next five years. This was largely due to Ramsay returning the Peel Health Campus contract to the government in August 2024, which accounted for roughly 3% of fiscal 2024 Australian activity. In addition, Australia saw a decrease in volumes from public activity in private hospitals due to government budgetary constraints. Cost of living pressures are also resulting in patients avoiding out-of-pocket fees.

Nonetheless, shares are materially undervalued. We think the market has a myopic view of Ramsay’s profitability. Longer term, we expect margin expansion as activity trends in higher-margin work recover and staff availability increases. In addition, while margins are constrained by digital expenses near term, we see this driving cost efficiencies longer-term by optimizing staff levels and reducing administrative paperwork.

Despite pandemic pressures weighing on Ramsay, the firm is increasing its capital expenditure to better position itself for long-term growth. The key areas of investment are brownfield and greenfield expansions in Australia, and digital overseas. We are positive about the Australian development pipeline as it strengthens Ramsay’s cost advantages derived from scale, typically pays back in three to four years, and is low risk as demand in the area is already established. Ramsay is focusing on increasing its day surgery capacity as the proportion of day surgeries at Australian private hospitals has increased to roughly 65% from 60% in the last 10 years. The firm also sees opportunity for integrated care and higher-margin nonsurgical ancillary services such as rehabilitation and mental health. Ramsay is also strategic by adding doctors’ consulting rooms to hospital sites which encourages higher usage of on-site operating theaters. Relationships with referring physicians is key and Ramsay is reliant on maintaining its reputation for quality of care and modern facilities. The focus on digitization in Europe is also strategic given synergies from integrating IT are relatively easy to capture.

Auckland International Airport - Industrials 

  • Star rating: ★★★★
  • Fair Value: $7.30 
  • Uncertainty: Low 
  • Economic moat: Wide

As the primary gateway to New Zealand, Auckland Airport is set to benefit from rising air travel to the island nation. Auckland Airport is the largest airport in New Zealand, and Auckland is by far New Zealand’s most populous city. No other airport in the country is likely to outdo Auckland as an international hub. We expect the airport to capture good medium-term growth from further airline capacity expansion to and from New Zealand. We forecast total passengers handled by Auckland to grow to more than 25% above pre-covid levels over the next decade.

Auckland Airport has carved a wide economic moat, thanks to its near-monopoly position in a stable regulatory environment. We don’t think a second major airport is likely to emerge anytime soon, given Auckland Airport’s expansion potential to accommodate continued growth in passenger numbers, protecting its position for decades to come.

Aeronautical and nonaeronautical operations each contribute about half of revenue, with profitability typically higher in the nonaeronautical business. The aeronautical business is regulated. The regulator allows Auckland Airport to earn a suitable return on its “regulated asset base”, which includes prior capital expenditures and some revaluations. Landing fees and per passenger charges are set with airlines every five years, and independently reviewed to ensure Auckland Airport isn’t abusing its monopolistic power. But this structure presents near-term earnings risk—passenger fees are set up to five years ahead, lower-than-expected traffic could weigh on returns on invested capital. Nevertheless, capital investments are typically structured with some flexibility should lower traffic eventuate, reducing the risk of extended overcapacity.

The nonaeronautical business is unregulated, but still principally driven by passenger traffic. Retail operations are the biggest part of the nonaeronautical business—notably duty-free, which relies heavily on international passengers, who far outspend domestic travelers. The property business is about half the size of retail, but has grown faster, driven by new developments and rent reviews. Car parking rounds out the bulk of unregulated earnings.

Auckland international is on James Gruber's 16 ASX shares to hold forever. Read the article here.

Dexus - Real Estate

  • Star rating: ★★★★
  • Fair Value: $10.00 
  • Uncertainty: Medium 
  • Economic moat: Narrow

Dexus is a diversified Australian REIT that generates income from charging rent; managing property for clients; funds management, which typically includes property management and investment management services; and development and trading.

Rent is the biggest revenue driver, with the office and industrial divisions accounting for the vast majority of funds from operations. High-quality offices in Sydney dominate; Dexus has interests in many trophy assets including Sydney’s 1 Farrer Place and 1 Bligh Street. It also owns or manages a seasoned industrial portfolio, including the massive Dexus Industrial Estate in one of Australia’s fastest-growing industrial precincts, Truganina, Victoria. It has a small retail portfolio, mostly retail sites attached to offices, and a small healthcare portfolio. Dexus has sold stakes in office, industrial, and healthcare assets into funds management vehicles that it manages.

Funds management is the smallest but fastest-growing portion of revenue, accounting for nearly 20% of funds from operations in fiscal 2024. We anticipate more developments being rotated into funds management vehicles, adding capital efficiency and management fees. We expect funds management revenue, assisted by the acquisition of AMP Capital’s domestic infrastructure equity and real estate business in 2023, to increase by about 60% by the end of our 10-year forecast period.

The high-quality office portfolio should see Dexus perform better than most, with more than half rated premium by Property Council of Australia guidelines and most of the rest A grade. Dexus' portfolio has held up relatively well in major downturns compared with rivals with lower-quality portfolios. Office faced challenging conditions during 2020-23, with pandemic lockdowns followed by rising interest rates. But Dexus has a staggered portfolio of lease expirations through fiscal 2029, and its office occupancy rate remains well above the market average.

Audinate - Technology 

  • Star rating: ★★★★★
  • Fair Value: $18.50
  • Uncertainty: High 
  • Economic moat: Narrow

We expect Audinate’s strategy to primarily focus on accelerating the secular transition toward digital audio networking. Secondarily, we expect Audinate to focus on building out its nascent business for digital video networking.

Audinate’s Dante protocol has become the world’s most widely used protocol for digital audio networking and boasts a more-than 10 times lead over its nearest competitor, Ravenna, in terms of the number of products enabled with the protocol. Given Dante’s dominant market share, we see little remaining upside for Audinate from gaining incremental market share from direct competitors in digital audio networking. However, we do expect Audinate to use its network effect, its existing customer relationships, and its scale on research and development to accelerate the AV industry’s transition toward digital audio networking. Specifically, we expect Audinate to continue creating new hardware and software solutions that unlock new device use cases and to continue developing new software solutions for AV professionals. We estimate Audinate has around 10% market share in audio devices, which leaves Audinate with a large and highly winnable market opportunity, as the industry digitizes. Additionally, we expect Audinate to gain significant pricing power, especially in its software segment, as its network effects continue to strengthen.

We also expect Audinate to continue developing its nascent digital video networking business, although we view this as a more uncertain and likely less profitable opportunity. Video networking has unique challenges compared with audio, primarily due to the larger data intensity inherent in video data delivery. Because of this, digitally networked video uses various compression technologies that are usually not compatible with each other and therefore hinders the establishment of network effects. However, we believe network effects from Dante’s audio solutions will help pull in AV professionals, who are already familiar with the Dante protocol, which in turn pulls in original equipment manufacturers, or OEMs.

At current prices, Audinate shares screen as materially undervalued, as the market appears to believe the company’s slowdown may signal a loss of competitive position or an exhaustion of its addressable market.

APA Group - Utilities 

  • Star rating: ★★★★
  • Fair Value: $9.30 
  • Uncertainty: Medium
  • Economic moat: Narrow

APA Group is Australia's premier gas infrastructure company. Limited regulation, scale, and a superior skills base help it capitalize on gas demand growth and generate competitive advantages that warrant a narrow economic moat. However, gas market reform and potential regulation of pipelines could weaken its competitive advantages. Fair value uncertainty is medium, as secure revenue is balanced by high gearing and limited transparency over customer contracts.

APA Group is Australia's premier gas infrastructure company. Gas transmission and distribution is the core business, generating more than 80% of group EBITDA. Power generation—wind farms, solar farms and gas power stations—contribute about 11% and electricity transmission, asset management and investments contribute the balance. The investments division owns stakes in small energy infrastructure companies and the asset management division provides management, operating, and maintenance services to third parties and part-owned companies, leveraging APA’s skills base.

APA’s long-distance gas transmission pipelines and power generation assets typically operate under long-term, CPI-linked contracts with energy retailers, LNG exporters, and major industrial/mining companies. Returns are traditionally 100 to 200 basis points above regulatory returns to compensate for higher demand risk. Electricity transmission and gas distribution networks are regulated, with returns set by the Australian Energy Regulator to provide fair profits after covering reasonable costs.

APA Group's core strategy during the past decade has been to create an integrated east-coast gas transmission grid connecting multiple gas sources to multiple markets. This is now complete following numerous acquisitions and the firm is progressing a similar strategy in Western Australia, connecting to remote mine sites and towns. Expansion creates economies of scale and synergies from linking pipes together into a network with one manager. Further acquisitions of transmission pipelines are unlikely given competition concerns, but organic expansion is ongoing.

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