One advantage that individual investors have over professionals is that they don’t need to think in quarters. We don’t even need to think in single years – or in any arbitrary period of time for that matter. We only need to think in timescales that match the financial goals we are investing to achieve.

Meanwhile, a lot of fund managers will be starting to ready their quarterly reports in an attempt to rationalize what happened to their clients’ portfolios over the past three months. What did well. What didn’t do so well. What they think might happen in the next few months.

The three shares covered in today’s article didn’t do well over the last quarter. In fact, they were among the ASX’s worst performers. That in itself doesn’t matter that much. As I said, all we really care about is an investment’s potential to help us towards our long-term goals.

What we are interested in today is whether these recent losers have now fallen too far. Because if they have – and if they meet your investment criteria – they might be worthy of consideration in the context of your investing goals.

Not worked out your goals and investment criteria yet? Take a look at this four-step guide from Mark Lamonica to defining your investing strategy.

Once you have, keep reading to see whether these three dogs of the ASX have really fallen too far. Spoiler: one screens as being very cheap, one as undervalued and one still looks expensive. Let’s start with the cheapest.

Beach Energy (BPT)

Moat rating: No Moat
Share price October 2: $1.19
Fair Value estimate: $2.40
Star rating: ★★★★★

Beach Energy is Australia’s largest onshore oil producer. It produces oil, gas, and gas liquids from multiple wholly owned projects and joint ventures in the onshore Cooper, Perth, and Eromanga basins, and offshore in the Otway, Bass, and Taranaki basins.

Beach merged with Cooper Basin joint-venture partner Drillsearch Energy in March 2016, which increased equity production to about 10 million barrels of oil equivalent. This more than doubled to over 20 million boe following the purchase of Lattice from Origin Energy in 2018.

Our Beach analyst Mark Taylor has assigned a No Moat rating to Beach, meaning he doesn’t think it benefits from a sustainable competitive advantage. Most moats in commodities come as a result of being a low cost producer, and Beach is not one of them given its development-intensive operations, small fields and onerous product transport costs.

This is compounded by the fact that even with addition of Lattice, Beach does not have sufficient reserve life to justify a moat. Indeed, Beach’s share price weakness over recent months was partly due to it reporting a 20% fall in proven and probable reserves from the same time last year.

Despite this, Taylor thinks that Beach’s Waitsia Stage 2 gas project in the Perth Basin and other developments leaves the company well placed to reverse its falling inventory trend. He recently kept his Fair Value estimate for the shares at $2.40, approximately double the recent market price of $1.19.

Cochlear (COH)

Moat rating: Wide Moat
Share price October 2: $291.42
Fair Value estimate: $225
Star rating: ★★

Cochlear is the market leader in cochlear implants, which became the standard of care many years ago for children in first world markets with profound hearing loss or deafness. This segment of Cochlear’s business is largely penetrated by now, so focus has shifted to encompass adults in developed markets and children in emerging markets.

Our analyst Shane Ponraj views Cochlear as a wonderful business that can earn excess returns on capital for at least 20 years. Cochlear’s brand recognition and switching costs for patients once an implant is installed underpin this Wide Moat rating. Parts from other vendors won’t fit Cochlear devices, therefore making its service and replacements business an almost annuity-like revenue stream.

Cochlear has around 60% market share in the infant market, which is essentially fully served by this point and growing roughly in line with birthrates. Ponraj therefore expects most of Cochlear’s growth to come from rising upgrades and accessories revenue in the installed base, as well as growing adoption of Cochlear devices by seniors. It’s worth noting, though, that hearing aids remain the standard of care for seniors as opposed to cochlear implants.

Ponraj’s positive take on the quality of Cochlear’s business model is reflected by impressive forward revenue and profit growth forecasts of 11% and 15% per year respectively. However, a current share price of around $290 is almost 30% above Ponraj’s $225 Fair Value estimate, suggesting that the market is pricing in even stronger performance from the company.

In short, we think Cochlear is an exceptional business trading at too dear a price.

NIB Holdings (NHF)

Moat rating: Narrow Moat
Share price October 2: $5.92
Fair Value estimate: $7.20
Star rating: ★★★★

NIB is Australia’s fourth-largest private health insurer. Like other health insurers, its business model is to collect premiums at a price that allows it to service claims from policyholders while having enough left over to keep as profit.

NIB over-earned after the outbreak of Covid as less patients checked into hospitals for elective surgeries and dentist visits also fell. As a result, NIB’s profitability was always likely to taper off, however, the company’s results in August showed a faster than expected fall to more normal margins.

This hit the shares significantly but our NIB analyst Nathan Zaia thinks the long-term outlook for the company is favourable. He expects NIB can grow its number of policyholders at around 2% per year between fiscal 2025 and 2029, almost double the rate of growth he expects for the broader sector.
He expects NIB’s cost advantage over smaller peers to help in this regard. NIB’s existing 10% share of the market gives more bargaining power with healthcare service providers, helping NIB stay competitive on price and policy features while freeing up funds for brand and advertising campaigns.
In addition to cost advantages, Zaia’s Narrow Moat rating for NIB is also underpinned by the presence of switching costs for existing policyholders. The time needed to compare different options discourages consumers from switching. Meanwhile, waiting periods of up 12 months which must be served out before being able to claim for some extra services.

At a recent price of under $6, NIB shares traded almost 20% below Zaia’s Fair Value estimate.

Remember that individual shares and investments should only be considered as part of a broader investing strategy. Read this article for a step-by-step guide to crafting yours. For a summary of terms used in this article, please read the explainers at the foot of this article.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.