There are about 2000 companies that fall into the micro-cap universe, and it’s the nursery for those companies that will go on to become future leaders on the ASX. The challenge is finding quality; just 25% of companies with a market cap under $250 million make a profit, and only 14% pay a dividend.

So, in this episode of Buy Hold Sell we’ve enlisted a couple of micro-cap fund managers to help uncover a few diamonds in the rough. James Dougherty from Lennox Capital and Oscar Oberg from Wilson Asset Management share their views on Helloworld, Jumbo Interactive, and Adairs. We also ask each of the panelists to nominate a ‘high-quality' micro cap that they believe is compelling today.

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James Marlay: Welcome to Buy Hold Sell. My name's James Marlay. Today, we're talking about the small end of the market. There's lots of stocks in the micro-cap space, but what sets apart the quality from the rubbish? James Dougherty from Lennox Capital is joining us and Oscar Oberg from Wilson Asset Management.

Helloworld (ASX: HLO)

I'll start with you. Helloworld, Oscar, buy, hold, or sell?

Oscar Oberg: James, it's a hold for us. I think management's done a great job taking costs out of the business over the last couple of years. Think the market's going to be looking at top line growth, particularly from that retail segment, and adding more franchisees to the network, which we haven't seen yet, so it's a hold for now.

James Marlay: Okay. Travel bookings? Who would have thought it was an attractive business, but it's done quite well. Helloworld, buy, hold, or sell?

James Dougherty: It's a buy for us. Agree with Oscar they've done a fantastic job over the last couple of years, and it's been a really difficult operating environment. International airfares have been the lowest they've been for a long time. If you get a stabilisation in the operating environment or even an improvement, then all the work they've done in the last couple years on marketing and costs, you might see some good operating leverage, and I think it ... close to half what the other travel companies are trading at. It's pretty interesting.

Jumbo Interactive (ASX: JIN)

James Marlay: Okay looks cheap. All right, Jumbo Interactive, lotteries. It's been around for a long time. Buy, hold, or sell? It had a good result as well.

James Dougherty: Yeah, it did have a good result. It's a hold for us. Look, fully acknowledge that they've done a really good job with customer acquisition and slowing down churn, but the share price move in August meant that it's now a hold for us.

James Marlay: Okay, Oscar. Jumbo Interactive, buy, hold, or sell?

Oscar Oberg: It's a strong buy for us, James. The changes to Powerball have been very positive for the business, from the perspective of the first eleven jackpots of FY19 have had a value 60% higher than the average over FY18. It's a very strong balance sheet. There's prospect of special dividends and acquisitions. It's a buy.

Adairs (ASX: ADH)

James Marlay: Okay. We've all been warned about the arrival of Amazon, or the rolling over of the Australian housing sector. Adairs has been cracking higher. Buy, hold, or sell?

Oscar Oberg: It's a buy for us. We really like this one. We think Adairs is a fashion retail as opposed to a retail exposed to the housing cycle. Management's done a great job turning the business around. The product's looking good into Christmas and competitors are struggling. It's trading at a PE of 11 times, and we think it will grow 20% next year so it's a buy.

James Marlay: Okay. Compelling case there from Oscar. Buy, hold, or sell?

James Dougherty: I agree with Oscar, it's a buy for us. We think the market is still perhaps penalising the company for an inventory mistake back in 2017. Trading on 10 to 11 times PE, probably again half of what a lot of the other specialty retailers trade at. We think it's a good buy.

James Marlay: I've asked you to bring along a quality micro-cap, something that's flying under the radar people might not know. What have you got for us?

Fleetwood Corporation (ASX: FWD)

James Dougherty: Look, we've got a strong buy on a company called Fleetwood Corporation. Fleetwood arguably had a chequered past; the reasonably new CEO, Brad Denison, has spent the last few years turning that around. They sold their last legacy business which manufactured caravans. Now they just provide good exposure to the manufacturing of modular accommodation. What you're seeing is that there's big spend coming from governments on the east coast in corrections, in education. They're over 60% market share.

James Marlay: Okay. Oscar, have you got a stock that meets the quality label in the micro-cap end of the market?

PSC Insurance (ASX: PSI)

Oscar Oberg: Yeah, the stock we like is insurance broker PSC Insurance. This business listed back in November, 2015. It's continually beaten the market's expectations. It's benefiting from a very strong organic growth profile through rising commercial insurance premiums and also the construction sector. Management own over 70% of the stock on issue, and there's a good acquisition pipeline in both Australia and the UK. So it's trading at 22 times PE and we think it will grow to over 25% next year. It's a buy.

James Marlay: Okay. Well, they might be small. But there's plenty of ideas and plenty of opportunity at the micro end of the market.