ASX small caps haven't been this cheap since the GFC: is it threat or opportunity?

Small caps haven't been this cheap relative to large caps since the GFC. I'll just let that sink in for a moment.

I was in high school when the GFC hit. I didn't understand the mechanics of what was unravelling, but I remember the mood: the dinner table conversations, the news cycle, the sense that something serious was happening in a world I hadn't yet entered. So when a seasoned investor uses the GFC as a reference point for how cheap part of the market has become, I pay attention.

Marc Whittaker isn't sounding the alarm; IML Portfolio Manager is pointing to an opportunity. While capital continues flooding toward AI winners and mega-cap tech, quality small cap industrials are being quietly left behind. Having started his career during the dot-com boom in 1999, Whittaker has seen narrow rallies before and understands what tends to happen next.

In this week's Q&A, he shares what he has been buying, what he has been trimming, and why patience remains one of the most underrated edges in investing today.

What’s your most recent investment and why?

We have most recently added a new position in Vista Group (ASX: VGL) in our Small Caps strategy. Vista Group International is a dominant global provider of cinema management software, operating across the entire film industry supply chain - from studio distribution through cinema exhibition to the consumer's movie discovery experience (yes, including the candy bar). The company serves over 4,400 cinemas across 80+ countries.

The core investment thesis rests on Vista's transition from legacy on-premises software to Vista Cloud. From a market point of view, there remains a deal of scepticism around whether Vista can successfully transition the bulk of its current client base to the cloud. 

Our recent conversations with customers and competitors strongly suggest the cloud transition will be successful.

A cloud migration reshapes the company's revenue quality (migrations can take over two years; as such, customers only want to do this once) and margins, all whilst strengthening Vista’s status as a global leader in its niche vertical.

Which investment did you add to your watchlist this week?

Two stocks that we have had on our watchlist in recent times are REA Group (ASX: REA) and SGH Limited (ASX: SGH), both in the mid-cap space. Both are higher quality businesses but have traded at elevated valuations as a result. 

Recent volatility in markets means that we are starting to see valuations around some of the quality names in the market become more attractive. In other words, quality at very reasonable prices. 

We have added both REA and SGH in our Future Leaders mid-cap fund recently.

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

We are living in most interesting times right now! The uncertainty stemming from the Iranian confrontation means that good defensive yield stocks have held up better in market while higher growth quality names, which have been more expensive, have pulled back. 

For us, this has been an opportunity to “high-grade” the portfolios, trimming positions in companies that we still like, but that have outperformed recently, such as Aurizon (ASX: AZJ), TPG Telecom (ASX: TPG) and Ampol (ASX: ALD), and adding to names such as REA, SGH and Vista, among others. 

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

The mania we are seeing in all things AI-related is fascinating to watch. I started in markets back in 1999, with the dot-com boom in full swing. Back then, it was telcos and emerging internet companies that were highly favoured and heavily overvalued. Now, it’s the hyper-scalers, data centre owners and chipmakers that can do no wrong. 

The chart below is the 12-month performance of semiconductor manufacturer Micron Technology in the US. The stock was up +15% in the US last Friday, adding US$112bn in market cap in one day. One year ago, its entire market cap was US$100bn! 

There is a narrow rally in markets happening now, with lots of attractively priced companies being left behind in the scramble. 

That’s certainly the case in Aussie small cap industrials.

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

A rival takeover offer for Ooh Media (ASX: OML) by I Squared Capital, trumping an earlier bid by Pacific Equity Partners. OML, which we own across our funds, is the leading outdoor advertising business in the country, and has been trading cheaply, given market concerns around advertising spend in the face of rising interest rates and weaker consumer confidence. 

It’s still early in the process, but any bidding tension in a takeover situation is always welcome!

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

Small cap industrials are failing to find traction with investors in the current environment. 

Small caps are trading at their biggest discount to large caps since the GFC. This will correct at some point. 

In the meantime, we get a chance to cast our eye over plenty of good quality stocks at very attractive prices.

What first drew you to markets and what continues to keep you inspired today?

I just fell in love with markets and investing while at university. It probably wasn’t a world I had much exposure to before that, but once my eyes were open, I was hooked. 

Investing is both an art and a science. The numbers can tell you one thing, but experience, relationships, insight, curiosity, research and a healthy level of scepticism are also necessary. You will never have the “full answer.” 

In this industry, you are always learning, often having your eyes opened, and always being humbled. You will get things wrong!

What’s one piece of advice you’d give to new investors?

Patience. Investing should be about long-term wealth creation and long-term focus. It’s not a get-rich-quick scheme. You will make mistakes. That’s why fundamentals are important. 

No matter what market bubble or fad is beguiling markets at a point in time, ultimately, fundamentals matter. 

As an investor, you should understand what you own and why you own it.     

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

I am passionate about coaching junior rugby league, with the Clovelly Crocodiles in Sydney’s eastern suburbs. Coaching young people in sport is very rewarding. And, if anybody thinks investing in volatile markets is challenging, nothing humbles you more than coaching a group of nine-year-olds! They will listen to me one day…

Rapid fire! 🔥

Favourite investing book?

The Intelligent Investor – a foundational and must-read for any investor, be they value or otherwise.

Favourite investing or finance/markets-related podcast?

The Investor’s Podcast covers a wide range of topics and history in markets.

The first thing you read each morning?

AFR for local and Bloomberg for overnight market news.

Favourite restaurant?

Mappen in Bondi Junction is a regular. It is good, simple and reasonably-priced Japanese food. Good for families on a budget.

Something people are surprised to learn about you?

My wonderful wife and I are parents to 6 children. They keep us grounded!

Think there’s a better pick? Prove it. Share your rapid-fire book, podcast, and daily read in the comments.

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