25 November 2023
The following article was published in Financial Standard on 24 November 2023.
While fears of a recession and market correction, and runaway inflation have caused small-cap stocks to underperform over the past couple of years, the opportunity for growth has never been greater, according to Flinders Investment Partners (Flinders) partner and portfolio manager Richard Macdougall.
In a recent interview with Financial Standard, Macdougall discussed the significant downturn small caps have experienced – the biggest since the Global Financial Crisis (GFC).
“For almost two years now, small caps have underperformed large caps, and for the most part this has come down to poor investor confidence,” Macdougall said.
“However, the macroeconomic conditions have not been as bad as people initially feared, and as such, small companies themselves have not done nearly as bad financially as people thought they would.”
While small caps have become cheaper, they are still making good money, which makes their valuation more and more attractive compared to large-cap stocks, Macdougall added.
“I just look at how cheap some of these really good small caps are – they have very low PEs, good dividend yields, they’re growing, well-capitalised – all the things we look for.”
Macdougall said he likes the look of telecommunications company Aussie Broadband, as well as campervan company Tourism Holdings. Both stocks are currently held in Flinders’ fund portfolio.
“Aussie Broadband is a misunderstood stock,” he said. “Right now, it’s the number five telco in the country for broadband, and the company has grown very quickly and very successfully.”
Meantime, Tourism Holdings, which recently merged with recreational vehicle manufacturer Apollo Tourism & Leisure, has become the dominant provider of camper vans for rental and sale in Australia and New Zealand.
“They’ve got most of the local market tied up, as well as exposure in New Zealand, Canada, the US, and now Europe. It’s a very interesting company,” Macdougall said.
The Flinders Emerging Companies Fund, launched in 2015, holds about 40 stocks. Since inception, the fund has returned 7.69% per annum.
Looking forward, Macdougall expects small caps to remain resilient.
“I’m not a chartist and I’ve never met a rich one, but it’s interesting that the small-cap market has bottomed three times at almost exactly the same level – in June and September last year, and in October this year… Each time it’s bounced quite well and looking like it’s doing the same thing now as after each of those previous lows.”
Macdougall added: “Remember, you don’t need a lot of upside before people start thinking, actually the small-cap market’s looking quite interesting.”
“If confidence in the earning outlook improves and investor confidence lifts, it is this asset class that will move.”