ASX Small Cap growth and diversification is being rewarded

Richard Hemming

Under the Radar Report shows you how your portfolio can achieve growth and diversification. No matter who won the election this month, it would have been good for the markets, because uncertainty is always a negative for investing. But the return of the LNP to power reduces immediate concerns for investors about new taxes, or more to the point, the continuation of a number of tax benefits for certain investors.

 

1. ASX Share Market - Banks are still cheap

Really, if Labor was Chalk, the Liberals were the Cheese for investors; and right now they’re drinking champagne – or sparkling wine and making hay in the third term – the good times don’t last forever!

Banks are still cheap! Australia’s financial services giants are benefiting from early signs of improving auction clearance rates in Sydney and Melbourne, which might be the start of a housing recovery. Also, the prudential regulator APRA has loosened lending restrictions and it’s short odds for an official interest rate cut next week.

Blue Chip Value Portfolio has being outperforming, principally due to its heavy weighting to the banks – CBA, NAB, WBC and ANZ, as well as its big holding in Medibank Private (MPL) and some domestic cyclicals such as JB Hi-Fi (JBH). The switch into Woolworths (WOW) hasn’t hurt, with this stock up close to 20% in the past three months.

The BCV Portfolio has returned close to 17% in 12 months vs ASX 200 12.5%.

Another key reason the Blue Chip Value Portfolio is doing well is that it aims not only to build wealth but also to protect it. Under the Radar Report’s valuation methodology means that companies with consistent earnings are more heavily rewarded than those that experience earnings volatility.

2. What about Small Caps?

Small Caps are the really big beneficiary from the tilt by investors towards growth. The end of election uncertainty is a positive for Australia’s economy and the associated relief means that the Small Cap space should benefit for a number of reasons:

i. Growth is being rewarded
The LNP is now in its third term. There are very few four term governments, which doesn’t make it impossible, but it is far from certain. Investors realise that the roll back of tax benefits could occur in the future if the ALP wins the next election so will be keen to capitalise on the current investor friendly environment by investing in growth. Small Caps are all about growth.

ii. Diversification benefits
Investors will want to vary their sector exposure in domestic equities and this is really only possible if they look at the much greater variety available in Small Cap stocks. There are over 2,500 listed companies on the ASX and more than 2,200 of those have market caps lower than $500m. That means 88% of listed ASX companies are Small Caps.

iii. Dividends
Small Caps aren’t as highly valued for their dividends because their earnings are more uncertain. But this means that you can get superior dividend yields from some small caps, which also means more of those franking credits.

iv. Domestic Exposure
Small Caps have more exposure to domestic economic activity than their larger counterparts, more of whom rely on growth from exports.

v. Stability

Under the Radar Report looks for big companies trading at Small Cap prices. Even though there are a great number of Small Caps, we are always looking for growth at reasonable prices. You get the potential and we work on minimising the price risk.

 

3. Where is Value in ASX Shares?

There are a lot more opportunities to find value in ASX Shares in the Small Cap arena simply because there are so many small cap stocks – remember there’s 2,200 of them!

In past issues we’ve been focusing on mining services, because there looks to be value here, but you have to be careful. We have more than trebled our subscribers’ moneys on the Small Cap FIFO operator Alliance Aviation (AQZ) and more than doubled their money on the likes of Southern Cross Electrical (SXE), MACA (MLD) and GR Engineering (GNG).

Timing is everything because we’re talking about cyclical beasts that are price takers. So if the opportunity arises, don’t be shy about realising some gains and taking some risk off the table.

We like a couple of stocks that are trading at below NTA. Go onto our website and look at Issue 345 on 23 May 2019 to find out which ones we like.

4. What about Small Cap Growth stocks?

One place we’ve had success on this front is med-tech and other health related stocks, which have completely different risk profiles and shows how well you can diversify in this sector.

We’ve had great success over the years with the likes of Medical Developments (MVP), Clover Corp (CLV) and Nanosonics (NAN) in recent times, and in the past we’ve also taken big profits on Sirtex Medical (SRX) and ImpediMed (IPD) to name two more.

Overall, luck and a good balance sheet plays a part, but we’ve had some great success because we’ve always focussed on a company’s finances and not how sexy the science is.

We’ve covered a number of med-techs in recent issues and we covered two more this week.

Overall, however, a strength of ASX Small Caps is that it embraces innovation and this is of core importance when it comes to technology stocks, whether it’s in IT, renewable energy, medical technology, as well as an online retailer like Kogan (KGN). We cover many of these technology companies in our recent issue, and we’re focussing heavily on a buying opportunity in next week’s issue.

ASX Small Cap growth and diversification is being rewarded.

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About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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