Beat volatility on the ASX by stacking the odds in your favour

Volatility in markets can be unsettling. Share prices swing hard on earnings beats and misses, algorithms amplify momentum, and sentiment often trumps fundamentals. But for long-term investors, this is where opportunity lives.

As Will Mumford, Deputy Portfolio Manager at Auscap Asset Management, points out:

“Ultimately, what’s going to drive the share price of a company is earnings over time. If you get big share price moves for reasons that aren’t fundamental, that’s a great opportunity for active managers.”

The way to tilt those odds, he says, is by owning quality businesses that regularly deliver positive surprises. These are companies with structural growth, aligned management, competitive advantages, and strong balance sheets. They tend to be forgiven when they miss and rewarded when they deliver. 

Car Group (ASX: CAR) is one such business. The risks, like softer demand or rising costs, are manageable. The opportunities, from new products to international expansion or AI-driven initiatives, are far more plentiful. 

“If you build a portfolio of stocks with these characteristics, you should be moving the odds towards your favour," says Mumford.

That principle flows through to Auscap’s positioning across sectors.

Consumer stocks: Best in class wins

Consumer discretionary has been one of the strongest parts of the market this year. Tax cuts, lower rates, firm house prices, and easing labour costs are helping. Retailers also reported robust July trading across Australia and New Zealand.

But Mumford is wary of cycle-only theses. 

“When I hear an investment thesis that’s just about a cycle, I get nervous. I like businesses that benefit from the cycle but also have structural initiatives driving earnings.”

That’s why Auscap has backed dominant players like JB Hi-Fi (ASX: JBH), Nick Scali (ASX: NCK), and Eagers Automotive (ASX: APE). Each has levers beyond the cycle - new products, international expansion, or productivity gains - that allow them to keep growing.

Importantly, the fixed-cost nature of many consumer businesses means profits can accelerate rapidly as conditions improve. Nick Scali showed this in 2021, when a 40% lift in revenue translated into 100% profit growth. Eagers has similar potential, with opportunities spanning acquisitions, electric vehicles through its BYD partnership, and international growth.

The lesson: in consumer discretionary, the best operators win over time.

Retail real estate shares many of the same dynamics as the consumer discretionary sector. Shopping centres are full, tenants are competing for space, and rents are rising. Limited new supply only adds to the strength of the backdrop.

HomeCo Daily Needs REIT (ASX: HDN) stands out for the team at Auscap, with a yield above 6% that is structurally growing and a share price trading at a discount to asset values. Institutional demand for retail assets is increasing, and a more supportive interest rate environment could add further momentum.

Mumford argues that the combination of income, growth, and valuation support make it a compelling risk-reward opportunity.

CSL and Sonic: A tale of two outcomes

Not all market favourites can deliver forever. CSL Limited (ASX: CSL) has long been considered a high-quality growth story, but recent results show why investors should be cautious. Rising competition in plasma, weaker R&D advantage, vaccine hesitancy, generics pressure, and a reliance on cost-cutting are all signs of a maturing business. 

“Sometimes it’s hard to tell whether you’re looking at a dominant business temporarily out of favour, or a maturing market darling facing structural issues," notes Mumford. 

In CSL’s case, Mumford concludes that the market’s scepticism seems justified.

Sonic Healthcare (ASX: SHL), however, tells a different story. The stock fell 20% after guiding to 25% EPS growth between FY24 and FY26, which was less than the market expected. But beneath the short-term disappointment lies a global leader exposed to long-term growth in healthcare and pathology. 

Sonic is expanding in high-value testing, has a strong international footprint, and could benefit from easing cost pressures, more rational competition, and longer-term trends in automation and AI. With the stock trading below the market multiple, Mumford argues that the volatility has created opportunity.