16 new stocks added to the ASX 300 - only 7 make a profit

Chris Prunty

QVG Capital

In March, QVG Capital presented a webinar which talked about, among other things, the proportion of unprofitable companies entering the ASX300. At the time we noted just 4 of the 14 entries were profitable. Given, the next batch of companies entered the S&P/ASX300 last Friday we felt it was worth updating this analysis.

Here it is

16 new stocks added to the ASX300 in September 2022 (Source: QVG Capital)
16 new stocks added to the ASX300 in September 2022 (Source: QVG Capital)

The table above shows the 16 stocks that have recently been promoted into the S&P/ASX 300 index. Every 6 months - in March and September - the champions that comprise S&P’s index committee get together and ‘promote’ and ‘delete’ stocks from various indices. The index committee don’t make exactly clear what criteria they use to make their decisions, but we do know entry and exits are largely dependent on the stock’s market capitalization, rank versus peers and its trading volumes.

To simplify; stocks going up and getting more liquid get promoted and those going down and less liquid can get cut.

Why the ASX300 is a big deal

The S&P/ASX 300 index is an important index. The 300 is the benchmark that index funds such as the $11.3B Vanguard Australian Shares Index (VAS) seek to replicate. It’s also the pool that many quantitative and institutional managers tend to use as a cut-off for their potential investable universe. In other words, entering the S&P/ASX 300 is a sign companies have ‘made it’.

Beware the index

The most interesting thing about the most recent set of 300 entries is the lack of quality. Just 7 of the 16 companies going in to the 300 are profitable.

By way of example, Deep Yellow and Boss Energy are unprofitable Uranium developers. Deep Yellow has been listed for 20 years and Boss for 15 years. Despite both being around a long time the track-record of earnings is abysmal. The Uranium market is tricky. Bulls point out that the spot price has been below cost of production for years so it’s inevitable that the spot price must rise to incentivise new production. Bears, such as us, point out that even Australia’s largest listed Uranium stock Paladin has only once made free cash flow in the 18 years it’s been listed. Amazing but true!

Just like the March cohort of 300 entries; speculative mining stocks are still popular. Argosy Minerals (ASX: AGY), Arafrura Resources ASX: ARU, Boss Energy and Deep Yellow, Mincor and Neometals all playing to this theme. The other thing they typically have in common is the need for further equity to support them to the promised land of profits.

So what is the practical application of all this?

Benchmark inclusion can be a trap for investors! Inclusion is a nice milestone but says nothing about the long-term prospects for a company.

Don’t get caught up in thematic mania (or if you can’t help yourself keep your bets small).

If you buy an index product, be aware you’re buying the good, the bad and the ugly.

And finally, stocks with weak fundamentals that are over-valued for technical reasons can present great shorting opportunities; ones the QVG Long Short fund seeks to take advantage of.

Find out more via QVG's upcoming investor webinar

If you're interested in hearing more from the QVG Capital team please register for our upcoming invest webinar to be held on October 4. The webinar will cover the recent reporting season, QVG's portfolio positioning and the outlook for our funds. Register Here.

........
Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

Chris Prunty
Principal & Portfolio Manager
QVG Capital

Chris Prunty is a co-founder and Portfolio Manager at QVG Capital; a boutique investment management firm specialising in smaller companies. QVG manages money on behalf of high net worth individuals and institutions in a 'best ideas' portfolio of...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.