Small caps have been sizzling in 2018 and there’s been big moves in a number of market darlings post their results. Analysts and investors have been left scratching their heads as earnings fundamentals seem at odds with the outsized market reactions. In this episode of Buy Hold Sell we’ve invited two small cap specialists to give us their assessment on some of the hottest names and biggest movers at the small end of the market.
Tune in as Oscar Oberg from Wilson Asset Management and James Dougherty from Lennox Capital deliver their verdicts on WiseTech, Afterpay, FlexiGroup, Infomedia and NextDC. Click on the player below to access the latest exclusive bought to you by Livewire.
James Marlay: Welcome to Buy, Hold, Sell. My name is James Marlay, and today we're talking about big moves in the small cap space. I'm joined by James Dougherty from Lennox Capital and Oscar Oberg from Wilson Asset Management. Oscar, we'll start with you, Wisetech Global, big PE, big moves – buy, hold or sell?
Wisetech (ASX: WTC)
Oscar Oberg: Wisetech is a sell for us. Valuation is extreme particularly for a company that's actually missed earnings expectations, believe it or not, in the last two results. It's also a roll up, it's made over 20 acquisitions in the past 18 months. There's integration risks. We think it's a sell.
James Marlay: Big multiple, James, buy, hold, or sell on Wisetech?
James Dougherty: Yeah, I agree with Oscar. It's a sell. Can't justify the valuation. Yes, technology seems good, addressable market is very large, but it feels like today's share price is capturing all that. Add to that, the latest data points on organic growth have been probably not what we were hoping.
Afterpay (ASX: APT)
James Marlay: Okay. Afterpay, it's been an absolute tear away success story. Buy, hold, or sell?
James Dougherty: It's a sell for us as well. Again, it comes down to valuation. They do have a really innovative product that seems to have captured consumers' attention but, it feels like today's share price is capturing all the upside and you have some new term regulatory risk coming maybe.
James Marlay: Okay. Oscar, Geoff told me this thing was going to be the next REA a bit over a year ago. Buy, hold, or sell on Afterpay?
Oscar Oberg: It almost got there on valuation terms about a few weeks ago, James. But look, we're a hold on Afterpay. I think management's done a great job particularly in the U.S. so far, which is in an early stage, but I think the U.S. opportunity has been factored in more than enough by the share price. It's a hold for us now.
Flexigroup (ASX: FXL)
James Marlay: Okay. FlexiGroup - It spent some time in the doldrums for a while. It was a value play for a long period of time. Buy, hold, or sell?
Oscar Oberg: Look, it's a buy for us. I think the result was very positive. We certainly are starting to see organic growth return to this business and there's most cost out to come through in FY 19. New CEO will be very positive for the business and can really focus on the growth of the cards business. It's trading at eight times PE. Growing in double digits. It's a buy.
James Marlay: Okay. Caught investors by surprise the result, James. Buy, hold, or sell on Flexi's?
James Dougherty: No. It's a hold for us. Yes, it is cheap. Looks like the business has stabilised, but we just think they can't catch up from a lack of innovation in investment in their product suite for a number of years and disruptors like ZipCo or AfterPay are going to take market share away from them.
Infomedia (ASX: IFM)
James Marlay: Another business that's been around for a while, bit of a chequered history. Infomedia. Buy, hold, or sell?
James Dougherty: It's a hold for us. The FY 18 result was really good. The new CEO Jonathan Rubinsztein appears to have got the business back into growth mode, but there was big share price move in August that probably puts it at fair value now. For us to say it is a buy, you'd need to see global growth accelerate significantly.
James Marlay: Oscar, Infomedia. Another really well known and widely held business. Buy, hold or sell?
Oscar Oberg: Yeah, it's a buy for us, so we own it in our micro-cap fund. We think management is really focused on growth here. The Superservice division outperformed expectations at the recent result. There's plenty of organic growth opportunities in large market and also acquisitions. So it's a buy.
NextDC (ASX: NXT)
James Marlay: We're all using our mobile phones, dining out on data. NextDC. Buy, hold or sell?
Oscar Oberg: It's a hold for us. Look, management's done a great job. There’s clearly structural tailwinds in this sector, but there's competition coming in and the valuation's extreme. It's a hold.
James Marlay: NextDC. It's been a darling in the market. Buy, hold or sell?
James Dougherty: The same. We're a hold. Look, Craig Scroggie has done a great job for five years now. Being exposed to the thematic of data consumption and the shift to the cloud is always a good place to be. But in the second half of FY 18, we saw sales slow significantly and that is a concern given their expanding their capacity for the largest amount they've ever done in the company's history. So, we're worrying that they are losing market share to a low price competitor.
James Marlay: You’ve got to be early on the small caps because when the big moves happen, you might be a bit late to the party.
IFM - if you had bought it 15yrs ago on the float you are still have 50% losses