After a strong run over the past six months the ASX 200 hit a record high in early March. Overall, the Australian share market is fairly valued as of 18 March. 

But that doesn’t mean that there aren’t bargains to be found. 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.

Want to learn more about investing? Take our free foundations of investing course to learn how to meet your investment goals. 

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 earningsn 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 close to fairly valued with the median price / fair value for our coverage at 0.96, a modest 4% discount. We’re still seeing larger-cap stocks more richly priced. 

Fair value of markets

Top shares in each ASX sector

Here’s our top picks for each sector.

  1. Basic materials: Newmont Mining (NEM)
  2. Communications: TPG Telecom (TPG)
  3. Consumer cyclical: Dominos Pizza (DMP)
  4. Consumer defensive: A2 Milk Company (A2M)
  5. Energy: Santos (STO)
  6. Financial services: ASX (ASX)
  7. Healthcare: Healius (HLS)
  8. Industrials: Aurizon Holdings (AZJ)
  9. Real estate: Lendlease (LLC)
  10. Technology: PEXA (PXA)
  11. Utilities: AGL Energy (AGL)

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Newmont Mining - Basic Materials

  • Star rating: ★★★★★
  • Fair Value: $76
  • Uncertainty: Medium
  • Economic moat: None

Lower production and dividend guidance, along with increased capital expenditure, were the main takeaways from no-moat Newmont’s 2023 result, which was weaker than we expected. After its recent purchase of Newcrest, we think management has taken the opportunity to reset expectations across the business, including updating mine plans at a number of assets. The company is also targeting the sale of six smaller, higher-cost mines. We think the strategy of owning a portfolio of larger, longer-life, lower-cost mines is reasonable. At around USD 1,440 per ounce in 2023, Newmont’s all-in-sustaining costs remain elevated. Along with rising production from remaining assets across our five-year forecast period, the disposals are likely to help return unit costs to within the second quartile of the industry.

TPG Telecom - Communications 

  • Star rating: ★★★★
  • Fair Value: $6.60
  • Uncertainty: Medium 
  • Economic moat: Narrow  

Shares in narrow-moat TPG Telecom screen as the most attractive under our Australia and New Zealand telecom coverage. We see catalysts for earnings recovery on several fronts and forecast an adjusted EBITDA CAGR of 5% over the next five years. Benefits from a more rational mobile market are clearly coming through, augmented by growth from fixed wireless and the corporate division. Cost-outs from the current transformation program are progressing slower than we had previously anticipated, curtailing near-term earnings growth amid the current 5G rollout-related capital expenditure hump. Overhang of major shareholders whose holdings are now out of escrow after the Vodafone merger is also causing some investor consternation. However, these concerns are more than reflected in the share price, especially given the longer-term tailwinds for the telecom industry as it makes the transition to 5G and as transformation benefits are gradually realized. 

Dominos Pizza - Consumer Cyclical 

  • Star rating: ★★★★
  • Fair Value: $61
  • Uncertainty: High 
  • Economic moat: Narrow 

Domino's Pizza is a high-quality company with a long growth runway. We forecast a 24% earnings compounded annual growth rate ("CAGR") for the next five years, underpinned by its global store rollout. Domino's sales growth has been volatile, and the share price tends to reflect near-term trading conditions rather than longer-term potential. The near-term outlook is uncertain and hinges on a moderation in elevated inflation. However, we believe the market is overly discounting Domino's intact and significant long-term growth potential. We forecast the network to grow to 6,200 stores by fiscal 2033, from some 3,800 as of June 2023, below management's long-term target of 7,100. Hitting management's target would lift our valuation by 11%.

A2 Milk Company - Consumer Defensive 

  • Star rating: ★★★★
  • Fair Value: $7.40 
  • Uncertainty: High 
  • Economic moat: Narrow 

A2 Milk is outperforming in a declining market. A2 Milk’s total infant formula sales lifted about 2%, despite double-digit declines in both value and volume in the broader Chinese market. The new registration process is proving highly disruptive, and births continue to decline. But we forecast fiscal 2024 revenue growth of about 5% for A2 Milk and expect the company to capture more share as increasing premiumization partially offsets falling births in China. Underlying earnings before interest, taxes, depreciation and amortisation ("EBITDA") for first half fiscal 2024 rose 5% on the previous corresponding period, or PCP, to NZD 113 million. We maintain our full-year forecast of NZD 231 million EBITDA—about 5% higher than fiscal 2023. Despite the double-digit rise in A2 Milk shares on the back of the result, it remains undervalued. We think the market is overly pessimistic on the pricing and volume outlook for Chinese infant formula and underappreciates the strength of the A2 brand in China, which underpins the firm’s narrow economic moat.

Santos - Energy

  • Star rating: ★★★★★
  • Fair Value: $12.30 
  • Uncertainty: High 
  • Economic moat: None 

We think Santos is not being sufficiently credited for new oil and gas developments underway, and the shares are cheap. A solid balance sheet and low costs, including a freight advantage to Asia, mean the company is well placed to weather any cyclical low prices. But crude and liquefied natural gas prices are strong now, and gas has a growing role to fuel the world, including to complement increasing renewable energy production. We forecast group hydrocarbon growth of around 50% by 2027, chiefly from the Pikka oilfield development in Alaska and reinvigoration of Darwin LNG's output due to new feed from the Barossa gas field development. We forecast Santos to largely maintain earnings in 2027 from buoyant 2022 levels as rising volumes offset a normalization in very favorable prices.

ASX - Financial Services

  • Star rating: ★★★★
  • Fair Value: $75.00 
  • Uncertainty: Low 
  • Economic moat: Wide

We view ASX as a natural monopoly providing essential infrastructure to Australia's capital markets. Despite the deteriorating regulatory environment, we believe the business is well protected by its wide economic moat based on network effects and intangibles. We also believe the energy transition is an underappreciated tailwind. We expect it to spark demand for resources, in which Australia holds strong natural endowments, to deliver new listings and a long tail of revenue from trading and clearing activity..

Healius - Healthcare

  • Star rating: ★★★★★
  • Fair Value: $3
  • Uncertainty: Medium 
  • Economic moat: None

We maintain our $3 fair value estimate for no-moat Healius following CEO Maxine Jaquet’s decision to resign after serving as CEO for one year. The past year has proven challenging to navigate, with higher-margin coronavirus testing revenue largely disappearing while inflationary pressures mounted. Shares are materially undervalued. Healius’ base businesses remain well-placed to service known underdiagnosis for routine healthcare services. In the longer term, we anticipate increased operating leverage from higher volumes in the base businesses and a continued focus on labor productivity and higher-value pathology tests and imaging modalities, which will more than offset current rent and wage inflation. We also anticipate margin expansion from network optimization, digital initiatives, and increases to out-of-pocket fees for non-Medicare items.

Aurizon - Industrials 

  • Star rating: ★★★★
  • Fair Value: $ 4.70 
  • Uncertainty: High 
  • Economic moat: Narrow 

The shares of narrow-moat Aurizon offer an attractive yield, underpinned by high-quality rail infrastructure and haulage operations. Considerable downside is priced into the shares, and our analysis suggests that risks for investors are skewed to the upside. Haulage volumes were weak in fiscal 2023 because of wet weather, but the outlook is for volumes to recover, haulage tariffs to rise with the Consumer Price Index, and as the regulated rail track is allowed higher returns. We think environmental concerns are overblown, providing an opportunity for investors to buy a better-than-average-quality company at a discount. Aurizon largely hauls coking coal from globally competitive mines. A commercially viable alternative to coking coal to make new steel is still a long way off.

Lendlease - Real Estate

  • Star rating: ★★★★★
  • Fair Value: $13.30 
  • Uncertainty: High 
  • Economic moat: None

Lendlease securities trade near net tangible assets. We think this is overly pessimistic, given that much of the group's EBITDA comes from intangible sources of income in its development construction and investment businesses that are excluded from net tangible assets. Despite headwinds, core operating profits rebounded in fiscal 2023. We expect further substantial uplift in development earnings in 2024 and management earnings longer term. Management reaffirmed at its annual results in August 2023 that it's on track for more than $8 billion of development completions in fiscal 2024. The target looks reasonable, since development work in progress increased to $23 billion (up from $18 billion at December 2022). Downside risks look more than priced in, and we see substantial upside if Lendlease reaches its targets in 2024 or 2025.

PEXA - Technology 

  • Star rating: ★★★★
  • Fair Value: $17.25 
  • Uncertainty: Medium 
  • Economic moat: Wide 

PEXA's Australian exchange business is demonstrating that it has the potential for exceptional margins and profits, in line with other financial exchange businesses. Moreover, this is becoming evident despite suppressed revenue from a subdued property market and elevated costs as the company develops and rolls out its exchange infrastructure across additional regions and use cases. We believe the market is overly focused on the loss-making UK business. We expect the UK business to either become profitable or be abandoned in the next years.

AGL Energy - Utilities 

  • Star rating: ★★★★
  • Fair Value: $12.00 
  • Uncertainty: High 
  • Economic moat: Narrow

Narrow-moat-rated AGL Energy reported a strong first-half result. Underlying EBITDA increased 78% to $1.07 billion and underlying net profit after tax NPAT more than quadrupled to AUD 399 million, compared with the weak prior corresponding period. Management lifted the bottom end of fiscal 2024 NPAT guidance by $100 million and now expects $680 million to $780 million. The upgrade reflects the strong first-half performance and improved generation fleet availability and flexibility. We increase our 2024 NPAT forecast by 6% to $714 million, but weaker wholesale electricity prices lead us to downgrade medium-term NPAT forecasts by 20% on average. Longer-term forecasts are less impacted as we expect a recovery in electricity prices. Wholesale electricity prices in Victoria are particularly weak and need to rise to encourage investment in new renewable supply, in our opinion. Regardless, the scheduled closure of the Yallourn coal power station in 2028 will likely get the market back into balance. AGL’s earnings should also get a boost over the longer term from completion of renewable generation and battery developments. We downgrade our fair value estimate 6% to $12 per share. We continue to think the stock is materially undervalued, trading on a forecast forward PE ratio of 8.3 and offering a 6% dividend yield at current prices. We think the market is overly pessimistic on the long-term outlook.