Buy Hold Sell: 4 crowded small caps and 2 that can outperform

Buy Hold Sell

Livewire Markets

Ask any investor for a small-cap tip, and they'll likely deliver one with more conviction than a soccer player begging for a free-kick. How often do they put the money where their mouth is? A safe bet would be rarely. 

But when multiple experts are backing the same horse, it's probably worth taking a good look. Blue Ocean Equities recently published research into the most popular stock picks across over 40 small-cap managers based on their top holdings - sounds like a fountain of ideas to us. 

So, we turned to Ben Rundle from Hayborough Investment Partners and Martin Hickson from 1851 Capital for their views on four of the most widely held small-caps on the ASX. They also each share one stock they think can outperform this year.

Click on the player below to watch the latest episode of Buy Hold Sell, brought to you by Livewire.

Note: This episode of Buy Hold Sell was shot on Wednesday 16th March 2022. You can watch the video, listen to the podcast or read an edited transcript below.

 

Edited Transcript

Ally Selby: Welcome to Buy Hold Sell. I'm Ally Selby and we have a very special one for you today. We scoured the top holdings of some of the country’s finest small-cap managers and today we'll be taking a look at some of their favourite stocks. Plus, we'll also be asking our guests to name one stock each for the year ahead. Today, I'm joined by Ben Rundle from Hayborough Investment Partners and Martin Hickson from 1851 Capital. First up we have plus size clothing brand, City Chic. I might start with you, Ben, is that a buy, hold, or sell?

City Chic Collective (ASX: CCX)

Ben Rundle (BUY): I think City Chic is a buy. Their recent result was actually quite good. Their stock sold off about 20%. I really like the management team and the way that they've approached the US market - I think they're going to have a lot of success from that (which they already have). It's a buy on the sell-off for me.

Ally Selby: It is beginning to feel like we're finally getting over COVID-19 with a reopening, could this stock really benefit? Is it a buy, hold, or sell?

Martin Hickson (BUY): I agree with Ben. I think it's a buy. Sold off significantly post result in February, I believe unduly so - the market is worried about the inventory levels. I think they can work through those. Trading on a multiple of 17 times, this is below the market. Phil Ryan is their CEO, and he is one of the best retailers in the country. So down here, I think it's a buy.

Uniti Group (ASX: UWL)

Ally Selby: Next up, we have Uniti Group, which recently just got a takeover offer. Is it a buy, hold or sell?

Martin Hickson (HOLD): I think it's a hold at these levels. It has rallied 30% on the back of that (takeover) proposal. Still trading 12% below the implied price, so I think at these levels Uniti's a hold.

Ally Selby: In its results, it reported that its revenues had lifted around 98% from the previous half. Is it a buy, hold, or sell?

Ben Rundle (HOLD): I think it's a hold as well. It's a great company but with a takeover bid on the table and only trading at a 20% discount to that, I think hold it for now.

Lifestyle Communities (ASX: LIC)

Ally Selby: Next up we have fundie favourite Lifestyle Communities, which nearly doubled its net profit after tax in the first half. Ben over to you, is it a buy, hold, or sell?

Ben Rundle (HOLD): I think it's a hold only on the valuation grounds. It's one of my favourite companies. I think the management team is absolutely first class. They've done a great job of showing why high levels of customer service can be such a success. I really like the business, they've grown without using extra capital, and will continue to do so. It's just super expensive, so it's a hold for me.

Ally Selby: It's share prices sunk around 21% year to date. Is it looking a little bit cheaper now? Is it a buy, hold, or sell?

Martin Hickson (HOLD): It's definitely looking cheaper than it was, but I think it's still quite expensive on 30 times PE. They've done a fantastic job over the last few years, got the tailwind of an ageing population supporting that business. But I think given that valuation, it's a hold.

Johns Lyng Group (ASX: JLG)

Ally Selby: Next up, we have Johns Lyng Group, which recently upgraded its revenue gardens for FY22 by 11%. Is it a buy, hold, or sell?

Martin Hickson (HOLD): Fantastic business. They're obviously benefiting from the recent floods across the East coast, made a highly accretive acquisition over in North America at the back end of last year. Great management team. Having said all that, I think it is all priced into the stock. It has a PE of 55 times, which is three times the overall market PE. So, I think it's a hold based on that valuation.

Ally Selby: It's also been caught up in the recent sell-off, its share prices falling around 7% in 2022. Is it a buy, hold, or sell?

Ben Rundle (BUY): Martin makes a good point. It's very expensive, but I still actually think it's a buy. I think that their earnings base is going to significantly increase off the back of these floods in Australia. And I think with a management team who have such a great track record buying a business in the US, they'll have a lot of success with that. So, it's one we're happy to stick with and buy.

Ally Selby: Okay. I'm really excited for this. We asked you to bring along one stock that you think can outperform this year. What have you brought for us today?

DGL Group (ASX: DGL)

Ben Rundle (BUY): DGL Group is the stock that I think can outperform. They are a producer of chemicals, they do storage as well as recycling of those chemicals. The beauty of this industry is that there are high barriers to entry in terms of the capital cost and the permits that are required to be able to operate. Simon Henry, the MD, owns just shy of 60% of the business. I think he's done a fantastic job. He's a very good capital allocator and he's already made about eight acquisitions since they listed. I think that it is a really exciting company and it'll be much bigger in a few years’ time.

Ally Selby: Martin, Ben picked DGL. What stock are you bringing for us today? What's your number one pick for the year ahead?

OzForex Group (ASX: OFX)

Martin Hickson (BUY): Mine's OzForex Group - a top holding for us at 1851. They operate in the foreign exchange space and trade on a PE of 20 times. They had an investor day today, which was very positive. I think what investors are missing is that a lot of the revenue and earnings from that business today comes from the small business and enterprise space. There are only two brokers that cover the stock, it is not well held by the market. They made a highly accretive acquisition a couple of months ago in Canada, so, we think that the PE can re-rate and the earnings consensus forecasts have been understating their growth. So, that's the topic for us at the moment.

Ally Selby: We hope you enjoyed that hit list of funding favourites today. If you did, why not give that episode of Buy Hold Sell a like? Remember to subscribe to our YouTube channel. We're adding new content every week.


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Buy Hold Sell

Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.

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