Stockhead special guests, Richard Ivers and Mike Younger are a part of the Zenith Small Caps Award-winning Prime Value Asset Management team.
History has shown that when markets fall, small cap companies often fall more. But when the market rebounds, small cap companies tend to rebound harder and earlier.
The recent down period for small caps presents excellent investment opportunities, according to Richard Ivers and Mike Younger, portfolio managers for the Prime Value Emerging Opportunities Fund. Their small cap fund has outperformed the small ordinaries and the small industrials indices (they don’t invest in resources) for each of the last six years.
According to Ivers and Younger, the Prime Value small cap team like to use such downturns to target quality companies.
“Every downturn provides some buying opportunities and this down period for small caps has been no exception,” Ivers said.
“Are we at the bottom? It’s impossible to be sure. But we can expect the rebound will happen eventually and in the meantime we are very selectively buying.”
Mike Younger adds: “Over the last two years small cap stocks are down around 20% while large cap stocks are up around 5%. Within small cap stocks, the smaller industrials have underperformed small resources stocks – this creates the potential for an additional rebound for small industrial stocks, including the potential for small industrials to rebound more strongly than small resources.”
Ivers and Younger say that the current market has many high quality defensive companies trading at a valuation discount to the Small Industrials average (19x PE FY24), and well below their long-term average.
“We think this presents an exceptional opportunity for long term investment returns.”
They add: “It is in times of change and volatility that the best opportunities are available. Historically they have been a fruitful time to invest as sentiment normalises and the earnings power of quality companies is proven.”
An example of attractive valuation is EQT Holdings.
Ladies and gentlemen, this is Ivers and Younger. Take it away!
EQT Holdings (ASX:EQT)
“EQT is a high quality trustee business founded in 1888 with long duration earnings streams. Management is taking steps to improve future returns by exiting its loss-making UK/Ireland operations and investing in systems that will drive operating leverage in future years.
“Its recent AGM update revealed that funds under supervision had grown +8% in the first quarter of the year, which is particularly strong for a company with longstanding sticky customers. EQT is one of two main players in the industry and its largest competitor, Perpetual Trustees, received a takeover offer last year.
“EQT currently trades on a consensus FY24 PE of 18x and FY25 PE of 15x which is attractive relative to its long-term one-year forward average of 21x. Its FY24 dividend yield of 4.4% fully franked provides a high and growing income stream. Earnings growth is accelerating, and return on invested capital is rising.
“Additionally, its recent acquisition of AET is delivering above expectations and we see potential for further upside to synergy targets. The balance sheet is strong and further accretive acquisitions opportunities may be available.
“EQT’s combination of resilient and growing earnings with historically low valuation multiples provides a very attractive risk-reward combination.
“Management seem to agree and have been buying the stock recently.”
IPH (ASX:IPH)
“IPH is the leading IP patent attorney in Australia, NZ and Canada. We are attracted to the business given the highly recurring nature of its business, sticky client relationships, its low earnings volatility, and management’s track record of execution on acquisitions and extracting synergies.
“Most of the company’s revenue comes via patents filed offshore (particularly in the USA) which ultimately require local filings in Australia – think about Pfizer launching a new drug into the Australian market.
“Typically, these clients will contact the same IP patent attorney they have used for decades, resulting in a sustained revenue stream without the need for overly expensive business development activities.
“Growth in patent filings is low, typically ~2%pa, but is resilient and predictable. And the revenue generated from a single patent can last decades, through filing, examination, prosecution, enforcement and renewal activities.
“Supplementing this with acquisitions in Australia, NZ, and more recently, Canada, IPH has achieved 10%pa EPS growth over the past 5 years. We see an ability for the company to continue this growth going forwards as it further spreads its wings geographically.
“Yet despite this, the indiscriminate nature of the small cap sell-off over the past two years has seen the stock de-rate from its historical forward P/E of ~21x to its current level of ~15x, providing a great opportunity for investors.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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