2 ASX small caps standing out amid the rally

Small and micro caps are often where the real action happens. As I wrote two weeks ago, it's been a great few months for Aussie small caps. 

Funds

Small caps surge 5.6% in August - Nick Guidera on what's moving beneath the surface

View

Throughout August, the ASX200 rose 3.6% from 8,662 to 8,973. The Small Ordinaries performed even better, adding 8.8% from 3,320 to 3,611, and leaving small caps ahead by 5.2 percentage points for the month. 

It's not only August. Over the past three months, from June to August, the ASX200 is up 6.6% (8,414 to 8,973), while the Small Ords have surged 12.1% (3,220 to 3,611). With that measure, small caps have outperformed by a healthy 5.5%, indicating a strong comeback for small caps.

Small caps are a part of the market that swings harder on earnings days, react faster to shifts in consumer sentiment, and can re-rate sharply when capital flows in or out. 

Recent reporting season was proof enough with single day moves of 20-30% not uncommon, highlighting both the risks and opportunities for investors willing to stomach the volatility. 

James Barker, Co-Portfolio Manager of the Ellerston Australian MicroCap Fund, is keeping a close eye on businesses that are actively reshaping their markets. 

In this Q&A, Barker shares his latest positions, sector views, and the lessons he's drawing from a market that feels as volatile as it is full of opportunity. 

What’s your most recent investment and why?

We recently initiated a small position in Baby Bunting (ASX: BBN). The company operates 75 baby goods stores across Australia and New Zealand and has the opportunity to double this over time.

Management has recently announced a reinvigorated store format, with the first three refurbishments delivering a stronger than expected sales uplift. On the back of this success, an accelerated refurbishment program has been announced. This should materially lift sales across the existing store base while improving margins.

Coupled with a 10% EBITDA margin target, this positions Baby Bunting for a step change in sales, profitability and the potential to cement itself as the category killer in its space.

Which investment did you add to your watchlist this week?

l added Acrow (ASX: ACF) to my watchlist last week. Acrow is a cyclical infrastructure play that should benefit from Australia’s multi-year infrastructure pipeline, especially in transport and energy transition projects.

After a multi-year upgrade cycle for the business, driven by both organic and inorganic growth, the group is in the midst of a quieter period due to project timing delays and a softer backdrop in commercial construction.

However, the medium-term outlook looks positive: Acrow is also well-leveraged to the 2032 Brisbane Olympics build-out, where a wave of construction across venues, housing, and transport will underpin demand for formwork and scaffolding in Queensland.

What is the most recent investment you have trimmed or sold, and what drove this decision?

We recently trimmed our position in Life360 (ASX: 360). We still think it’s a great business: the management team has executed very well, the unit economics are strong, and it’s gaining market share in the US and globally. 

They’ve demonstrated pricing power in their core subscription business and are still in the early stages of monetising their advertising revenue opportunity. Since listing on the NASDAQ, trading has started to transition to the US, with 60% of the last six months value traded overseas versus 40% the prior six months. 

This has been reflected in the share price and has now re-rated to trade at a premium to most of the offshore-listed app peers. Reflecting this, we’ve decided to bank some profits despite our long-term confidence in Life360’s fundamentals.

What’s your favourite chart or data point from this week?

My pick is the recent ACCC NBN broadband market share statistics: it shows how challenger telcos are chipping away at the incumbents, especially in high-speed internet plans. 

Over FY25, total NBN connections were roughly flat, but underneath that about 682,000 users migrated from lower-speed plans to high-speed (100Mbps and above) plans. 

Aussie Broadband (ASX: ABB) and Superloop (ASX: SLC) were big winners in this shift – they significantly grew their subscriber bases at the top end of town. 

Aussie Broadband and Superloop captured roughly 30% of all net new 100Mbps+ NBN connections in the past year, steadily eroding the dominance of the big four providers.

All up, the ‘challenger’ telcos now hold around 22% of total NBN connections (up from ~19% a year ago; and ~25% including the recent More Telecom/Tangerine deal executed by ABB). This trend is likely to continue with NBN Co set to migrate 100Mbps plans to 500Mbps soon for free. 

The two stocks have had a volatile month, both up and down, and as a result, the valuation gap between them has closed meaningfully. We continue to own both names and like the medium-term outlook as they continue to take share.

What was your weekly high - a standout market moment or highlight?

A bitter-sweet highlight of this week for me was a takeover bid for RPMGlobal Holdings (ASX: RUL). We first invested in RUL at 55 cents in 2017 (then capitalised at ~A$120m) and it has been a core holding in the portfolio ever since. 

RUL is a specialist mining software provider, delivering mission-critical solutions for planning, scheduling, and operations across the resources sector.

Following the sale of its advisory division a few months ago, RUL had fully transitioned into a pureplay SaaS business with a strong customer base, sticky mission-critical products, and as a result low churn and high net revenue retention.

This week, it received a non-binding indicative offer from the US$200bn Caterpillar Inc at A$5.00 per share. This was a 33% premium to last and valued the company at around A$1.1bn.

What was your weekly low – a market disappointment or challenge?

I think the biggest challenge over the past few weeks has been the volatility around results days. 

We’ve seen incredible single-day moves, such as Megaport (ASX: MP1), which had a 31% intraday move following its announcement of a reinvestment strategy to accelerate top-line growth, a swing that amounted to nearly A$600 million of market capitalisation. 

There were many other examples across reporting season, and overall, the volatility has been higher than in previous years.

What first drew you to markets or this sector?

I was first drawn to the sharemarket by the chance to meet different businesses and management teams across a range of industries. One day you’re with a retailer, the next a manufacturer or finance provider – investing gives you a front-row seat to how businesses and the broader economy function. That variety and constant learning kept me hooked early on.

What motivates me today is the small-cap end of the market. I like backing companies with the potential to become much larger – finding them early, and watching them scale into new regions or categories. 

Being part of that growth journey, from early execution through to maturity, is both challenging and rewarding.

How do you unwind when you’re not thinking about the market?

Usually, by stepping away from the screens - exercising outdoors or spending time with family and friends.