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Howard Marks, co-founder of Oak Tree Capital Management, one of the most respected risk professionals in modern investing. He's not known for chasing the hottest growth stocks. He is not known for predicting every market move. He built his reputation by focusing on something simpler but much more complex – controlling downside risk.
So today we apply Howard Mark's prism to the ASX. Not to find the most interesting companies, not to find those that are growing the fastest, but to ask a different question. Which ASX companies look strong enough, cheap enough and resilient enough to survive when the cycle turns? However, before we do that, a quick disclaimer.
Nothing in this video constitutes financial advice. necessary. Okay, let's begin. Howard Marks co-founded Oak Tree Capital Management in 1995. Oak Tree is best known for its loans, distressed debt, and investing in challenging market cycles. This is important because Marx did not build his reputation by buying popular stocks at any price.
He built it by asking, “What could go wrong? How much can we lose? And will this investment be able to survive the adverse environment? His book "What Matters Most" and his " Oak Tree" memoranda are widely used by professional investors. And the basic idea is simple. Risk control is more important than pursuing the highest possible return.
Because if you can't survive the recession, then growth doesn't matter. So what is Howard Marks really looking for? We built a three-layer lens from its primary sources. The most important thing is to master the market cycle and its “Oak Tree” memoranda. It has three essential elements. First, financial stability.
We want companies to have manageable debt, strong interest coverage, and no obvious signs of balance sheet stress. On this screen, this means a net debt to IBITA ratio below two and a half times and an interest coverage above five times. Secondly, a margin of safety . A good company can still be a bad investment if the price is too high.
Therefore, we look for companies whose prices are not set at the ideal price. For this screen, this means a price- to-earnings ratio below 25 times or an asset value-to- IBITA ratio below 18 times. Third, business sustainability. We want demand not to disappear overnight. This could mean steady income, reduced income, needed services, or steady customer demand.
The key point is the following. All three tests must be passed. A strong business cannot survive with the wrong price . A cheap company with a weak balance sheet doesn't make it. And a solid balance sheet in a fragile business doesn't work either. All three tests must be passed. Any single failure is a hard “no.” We started with the full ASX 200 index, approximately 200 companies .
After applying the leverage filter, net debt to EBDA below two and a half times, we dropped to around 120. After the valuation filter, price to earnings below 25 times, that number dropped to around 35. And after applying the business sustainability filter, 60% recurring revenue, stable profitability, three companies made the final shortlist.
This is the essence of a Howard Mark-style lens. It is not intended to give you a long list. It is designed to remove anything where the downside risk is too difficult to control. The closest to it is Sonic Healthcare's ticker SHL on the ASX . Sonic is a global pathology and radiology company. Simply put, it provides medical testing and diagnostic services.
These are not luxury services. They are part of the healthcare system . Doctors, hospitals, and governments still need testing throughout different economic cycles. According to our assessment, Sonic gets 14 points out of 14. First, financial stability. Net debt to IBIDA is approximately 1.9 times, and interest coverage is approximately 9.5 times.
This passes our balance test. Secondly, assessment. The price/ earnings ratio is approximately 19 times, which is below the threshold we used for this test. It is obvious that the price is not oriented towards perfection. Third, durability. The majority of Sonic's revenue comes from laboratory services, which are essential and recurring in nature.
So Sonic also passes the durability test. There are also some less noticeable positive aspects. The business is well established. The market does not treat it as a hyped stock, and the normalization of volume after the ratio has created a more controversial situation. But there is one point worth paying attention to.
A leverage ratio of 1.9x is still above the more conservative level that MarkX might prefer. So, for Sonic, the key factor to pay attention to is the stock of debt and covenant liabilities based on the results of each half-year. Our second closest analogue is GUD assets. ASX ticker GD 12 of 14. GUD manufactures aftermarket automotive parts, brake pads, filters, cooling systems, the components that cars need , whether the economy is growing or shrinking.
Price- to-earnings ratio of about 14 times, declining leverage, low analyst attention, which is exactly the type of quiet opportunity that MarkX finds interesting. Now let's look at a company that doesn't fit. And this example is instructive. Wise Tech Global, ticker ASX WTC. By many measures, it is a truly excellent business.
Net cash position over 80% of revenue from freight subscriptions . Influential and periodic. Strong competitive regime in global logistics software. But here's where Markx draws the line. The price- to-earnings ratio for Wisec has ranged from 60 to 103 times in recent years . This is not a safety margin .
This is the price of perfection. It's what Mark says he never pays. Also non- negotiable, it's hard to fail. And given the management concerns expressed in 2024 and the almost euphoric analyst consensus , Wisec gets an 8 out of 14. Great business, wrong price. Before we wrap up , there are three things this approach can't tell you.
First, management culture is invisible in a spreadsheet. MarkX places great importance on whether a management team will act with discipline under stress. The net debt ratio can't tell you that. You need to read annual reports, listen to investor calls, and watch what they do when things get tough. Second, choosing the timing of the cycle requires judgment.
This approach identifies companies that look like Mark-style opportunities . It doesn't tell you where we are in the cycle or whether now is the time to act. This requires a broader macro view that goes beyond what the numbers alone show. Third, the risk of failures is not taken into account. A low price/earnings ratio and a high percentage of recurring revenue can quickly collapse if the underlying business model is disrupted.
The approach does not take into account structural vulnerability. You still need to think carefully about the competitive forces at play. This is a basis for narrowing the field, not a replacement for doing the full job. Howard Marks once wrote: “ Risk is not the probability of loss. " That's the extent of the loss you can't recover from." That's the whole concept in one sentence.
Don't avoid risk. Understanding what risks you may experience. Survival first, profits later. Thank you for watching. If this information was helpful, subscribe to more ASX analytics. See you next time.
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