{"id":4654,"date":"2024-01-20T07:18:39","date_gmt":"2024-01-20T07:18:39","guid":{"rendered":"https:\/\/economicherald.net\/?p=4654"},"modified":"2024-01-20T07:18:39","modified_gmt":"2024-01-20T07:18:39","slug":"criterion-three-small-caps-that-tick-three-boxes-for-a-boom-24","status":"publish","type":"post","link":"https:\/\/economicherald.net\/?p=4654","title":{"rendered":"CRITERION: Three small caps that tick three boxes for a boom \u201924"},"content":{"rendered":"

Despite the parlous geopolitical climate, market watchers are heralding the volatile and higher-risk small cap sector as the \u2018it\u2019 investment theme for 2024.<\/p>\n

A key reason is the rising expectations of interest rates stabilising \u2013 and even falling \u2013 by the end of the year as the inflation demon is bought under control.<\/p>\n

Cheaper finance helps the market overall, but is especially handy for smaller companies with weaker balance sheets. Lower rates also bolster disposable consumer income, with sentiment already improving among the smaller retailers.<\/p>\n

Wilson Asset Management portfolio manager Tobias Yao predicts a \u201crobust\u201d year for the small \u2018uns \u2013 if only because they have underperformed since 2021 and are due for a rebound.<\/p>\n

Prominent fundie Roger Montgomery concurs: \u201cSmall caps can react very quickly when the narrative becomes positive and sentiment shifts.\u201d<\/p>\n

Since January 1 2022 the small-ordinaries index has declined about 12 per cent, compared with a circa 10 per cent gain for the all-ordinaries index.<\/p>\n

The outperformance of 22 per cent is the most accentuated since the Global Financial Crisis \u2013 after which the small caps went on a tear.<\/p>\n

On the flip side, the ASX 200 stocks look expensive, trading on an earnings multiple of 16 times compared with the historic average of 14.8 times. <\/p>\n

The sunnier small-caps outlook has been evident since late October and has been especially notable among the smaller retailers. Australian Bureau of Statistics showed record retail sales of $36.5 billion in November \u2013 the highest-ever reported and up 2.2 per cent year-on-year.<\/p>\n

Likely small-cap furniture and homewares beneficiaries are Adairs (ASX:ADH), Nick Scali (ASX:NCK) and the online Temple & Webster (ASX:TPW).<\/p>\n

Centennial Asset Management\u2019s Michael Carmody likes the housing-exposed Beacon Lighting (ASX:BLX).<\/p>\n

In the tech space he nominates mining services provider RPM Global (ASX:RUL) and the obscure compliance house Ansarada (AND), which provides virtual data rooms for M&A participants to manage confidential information.<\/p>\n

Of course, small caps are a large and ill-defined cohort so selecting the right stocks is critical: the underfunded duds will remain so no matter how much fairy dust the central banks spread.<\/p>\n

Tobias concedes that avoiding the turkeys \u201cis not as easy as it seems.\u201d<\/p>\n

To improve the odds of success, he looks for founder-led businesses of significant scale with strong organic growth and \u2013 of course \u2013 a healthy balance sheet.<\/p>\n

\u201cIf you can tick these three boxes in the small cap space it is a very good starting point.\u201d<\/p>\n

Yao cites the Singapore telco Tuas (ASX:TUA), which was demerged from TPG Telecom after TPG merged with Vodafone Hutchinson Australia in 2020.<\/p>\n

The fastest-growing telco in the prosperous Lion City, Tuas has grown market share from zero to 10 per cent over four years by offering better value for money \u2013 the same formula major shareholder David Teoh used at TPG to snare 25 per cent of the Australian market.<\/p>\n

He\u2019s a fan of Temple & Webster, the biggest online retailer enjoying the benefits of scale and AI initiatives to take share from traditional retailers in a fragmented market.<\/p>\n

The third leg of the Tobias Trifecta is Regis Healthcare (ASX:REG), the only ASX-listed aged care provider after Estia Health was subsumed by Bain Capital last year.<\/p>\n

\u201cThe sector has had a tough time with the Royal Commission into aged care and Covid,\u201d Yao says. \u201cRegis has had to deal with these challenges and is now thriving.\u201d<\/p>\n

Yao says the sector will benefit from baby boomers moving into aged care in large numbers, while smaller players leave the market because the compliance burdens are too great.<\/p>\n

\u201cOur view is you want to invest in the largest and most efficient operators in the sector.\u201d<\/p>\n

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.<\/em><\/p>\n

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.<\/em><\/p>\n

<\/span><\/p>\n

The post CRITERION: Three small caps that tick three boxes for a boom \u201924<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"

Despite the parlous geopolitical climate, market watchers are heralding the volatile and higher-risk small cap sector as the \u2018it\u2019 investment theme for 2024. 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