Three Disruptive ASX Small Caps
Just over 12 months ago our analyst team came up with disruptors, which have so far almost doubled the money of those brave enough to wade in and invest. Let’s see if we can do it again.
Those disruptors were: the champion of the BNPL market, Afterpay (APT) which was $32 and is now over $101 a share. The hydrogen technology company Hazer (HZR) was 40 cents and is 64 cents at the time of writing, while the laboratory technology specialist LBT Innovations (LBT) and David Kirk’s investment vehicle in private information companies Bailador Technology (BTI) haven’t performed as well, but are solidly up about 18%.
Read more about Investing in Small Caps. Why we picked these ASX Small Cap gems and their outstanding performance.
Before I go into a little detail about why disruption most often occurs at the small end of town, I’ll go through our current candidates:
Disruptive stock TUA
The TPG spin-off Tuas (TUA) is a newly established and disruptive entrant to Singapore’s mobile telco market. The stock offers an opportunity to invest alongside the most successful operators in the space. The company is being run straight from the David & Vicki Teoh playbook, who control the company along with this long-time supporter, the Millner backed ASX listed investment vehicle Washington H Soul Pattinson.
Disruptive stock AQZ
Alliance Aviation (AQZ) redirects assets to meet opportunities as they arise, and this is a tremendous strength in a business with fixed capital. Even if the reborn Virgin and Jetstar duke it out over the low-cost domestic travel market as it recovers, Alliance is still in a position to generate substantial cash flow and retain the flexibility to deliver benefits to shareholders over the medium term.
Alliance is probably the only airline in the world that has been profitable throughout 2020 and raising funds for expansion. The company increased its fleet by 35%, or 14 new Embraer aircraft, and its available revenue passenger miles by a much higher rate, putting the company on the flight path for growth over the next couple of years.
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Disruptive stock VHT
Volpara Health Technology (VHT) is a med-tech disrupter, operating a software-as-a-service business model that uses AI algorithms to improve the early detection of breast cancer by analysing breast images (mammograms) and associated patient data. It has integrated its breast screening technology with a software platform that incorporates patient tracking.
The NZ-based company has a first-mover advantage. While its competition has individual products and components, Volpara has a platform that enables it to screen, assess and track patients. This makes its integrated solution more powerful than fragmented product offerings.
When buying Small Caps you can profit from disruption
Disruptive forces such as fintech get a lot of press following high-profile successes like Afterpay (APT) and Zip Co (Z1P). In 2017 their valuations were less than $500m. Fast forward to today and APT alone is over $28bn, while Z1P is a “measly” $3.1bn. This kind of appreciation of value sees many new the market forgetting about the past disrupters Seek.com and REA in the world of digital advertising. These companies are now the establishment.
All these companies led investors to make huge gains, but it’s important to remember that disruption most often originates in the world of Small Caps. As we said last week, disruption is the natural space for small companies looking to grow quickly by building market share at the expense of their bigger counterparts.
Smaller companies finding lower-cost ways of doing business
Disruption sometimes means smaller companies finding lower-cost ways of doing business, unencumbered as they are by “legacy” technologies. Alliance Aviation (AQZ) isn’t widely known to be a disrupter because it’s in the aviation industry. But make no mistake, its success is due to its foresight in buying low-maintenance planes on the cheap and utilising a superior business model based on contracts that avoid day-to-day competition for seats that ties up the bigger airlines. If you doubt that is disruption, go and speak to Virgin Australia’s outgoing chief Paul Scurrah.
Overtime disruption becomes obvious
The point about disruption is that over time it becomes obvious, such as in the above situations. But early on, when there is big money to be made, there is always a great deal of uncertainty, which translates to very high risk. Initially, it is highly doubtful that a venture that involves shaking up an industry with a new business model or technology will be commercial. Trying something completely new is an unnatural business strategy and fraught with danger. It’s less obvious what the defensible advantage of the business is. Part of Under the Radar Report’s job is to work out which Small Caps are targeting the right competitive advantage.
On that front, sometimes we have track records to go by. David and Vicki Teoh should go down in business history as two of the great telco disruptors, as providers of low-cost affordable telecommunications and internet service provision to the masses. We hope they can do it again in Singapore with Tuas (TUA).
Technology can give a disruptive edge to a company
Other times there is the technology edge that we see in Volpara Health (VPT). The med-tech utilising AI to provide advanced breast screening, which is integrated with software that provides for decision-making and patient tracking. What makes this company different is that nobody else has come up with an integrated solution. Disruption is not only about being the lowest-cost provider!
There are many companies that have been on the right end of the disruptive wand, including IT cloud specialist Macquarie Telecom (MAQ), online retailers Kogan (KGN) and City Chic (CCX), med-techs Nanosonics (NAN), Sirtex Medical (SRX), Medical Developments (MVP), Clover Group (CLV), geographic technology provider Nearmap (NEA), junior telcos like BigAir (BGL) and MNF (MNF)… the list goes on.
Diversification is key when looking at disruptive stocks
The key take-out comes back to diversification. By holding a basket of Small Caps that have disruptive potential you can be the beneficiary of some really big returns. That’s why Under the Radar Report spends so much time hunting for candidates for subscribers’ baskets.
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