These stocks deliver on numbers that matter

Investors might do a lot better chasing top stocks instead of high-yielding promises from unlisted companies.

Investing is a numbers game.

If you are a sharemarket investor you have to understand risk.

Anyone who tries to sell you something that’s too good to be true is peddling exactly that. A recent incident comes to mind with the troubles brewing around the IPO Wealth Fund and its manager, Mayfair 101, which marketed high-yielding instruments, backed by non-­income producing speculative assets.

Last year the group marketed its “term deposit like” investment products yielding 3.25-6.7 per cent per annum with terms from six months to six years.

The group raised close to $200m in different vehicles, which purchased, among other things, Dunk Island in Queensland for $31.5m. This is a place that won’t be producing any income for years, having been through Cyclone Larry (2006) and Cyclone Yasi (2011).

Fast forward to today and all redemptions are frozen; a receiver has been appointed to key assets. It’s not looking good.

All investors need to know how risk has been artificially priced low by unparalleled buying by central banks, in particular by the Federal Reserve. This highlights the importance of cash flow and, by extension, dividends. Assets and liability maturities need to be matched.

This is very different from chasing yield for yield’s sake, which has been a feature in recent years. It’s similar to chasing growth without proper regard to risk, which is what we’re also ­seeing.

You do not invest in stocks solely for the dividends they pay; you invest in risk assets such as stocks primarily for growth.

Crucial to understanding stock risk is what you are paying for growth.

At the moment in the small-cap sector I have been impressed by companies that have managed to achieve the criteria I just outlined.

Select Harvests (SHV), MNF Group (MNF) and airline Alliance Aviation (AQZ) have strong balance sheets, they are all producing real cash and real yields.

Despite the COVID-19-related lockdowns, Aviation Alliance has actually upgraded its profit forecasts due to the strength of demand from its FIFO customer base.

In fact, Alliance Aviation’s stock has more than trebled since the crash. While it’s flying a bit high for my liking right now, the strength of its balance sheet and cash flow make it worth hanging on for the ride.

Junior telco MNF has also bounced above late February levels, the coronavirus having reinforced its reputation as a steady performer. I think the trend of people working and studying from home will continue, albeit not at peak lockdown levels. This stock deserves a premium, but again I wouldn’t be paying up after the bounce.

Then there is the almond harvester Select Harvests. In contrast to the other two, its stock has dropped in recent weeks after it produced an underwhelming interim profit result due to a weaker almond price. We don’t doubt that there is a great deal of agricultural risk in this stock, but the company can pay dividends comfortably and has growth prospects when the cycle improves.

The point about owning risk assets like stocks is to recognise where the risks lie and to ensure you can weather the inevitable storms. Dividends help you do that, but at the end of the day, you’re in it for growth.

Richard Hemming is an independent analyst who edits undertheradarreport.com.au

r.hemming@undertheradar­report.com.au