Obscure small caps that then grew into huge success stories have given investors across the country plenty to smile about this financial year. So, as FY20 beckons, we look for the next crop of undiscovered growth stocks that could be the big winners of the next 12 months.
With an average market cap of just $400 million, and year-to-date performance of 158%, the five stocks in this episode not only have headroom to generate huge growth but are well on their way already. So, tune in as Matthew Kidman hosts Michael Wayne and Henry Jennings to ask their verdict on these five hot small caps, including one that could be ‘the missing piece’ for the buy-now-pay-later companies like Afterpay and Zip.
Matthew Kidman: Welcome to Buy, Hold, Sell. My name is Matthew Kidman and I'm joined today by Michael Wayne from Medallion Financial and Henry Jennings from Marcus Today. We're going to go discovering, go and find those stocks, those small stocks that no one knows about.
First one, Audinate. In the music game, sound systems, been a boom stock. Buy, hold, or sell?
Michael Wayne: I've got a buy on this one. Essentially, they're selling five times as many products as the nearest competitor. They're growing their market share very nicely. They're looking to move from the audiovisual to the digital and video side of things, which potentially increases their market share, so it's an exciting business. Recently raised a fair bit of money, $20 mil, and that can help them drive the story even further to other parts of the world. Some very high-quality customers using their products, so a buy as an emerging business there.
Matthew Kidman: We're all listening to a lot of music these days and these guys have cornered their market. Buy, hold, or sell?
Henry Jennings: I'm a buy. Having said that, they have run really hard, this stock, so valuation may take a little while to catch up with reality, or reality might take a little while to catch up with valuation, but they are, as Michael says, in the right space, the right time. Digital audio networking, they've got a lot of good partners, Bose, the Yamahas of this world. They're growing strongly. They've got capital. They seem to have the right technology in their Dante platform, which they're rolling out and improving all the time. It's a buy from me, but they have run hard. That's my only concern.
Matthew Kidman: Okay, let's stick with the term digital. Digital signature. iSignthis, been another boom stock. Buy, hold, or sell?
Henry Jennings: It's a buy from me. I think it's the missing piece. I think we saw that with Afterpay recently when they came into problems with Austrac, in terms of money laundering and know your client. iSignthis are the guys that can do digital ID verification really quickly, really simply. It's being mandated. They've got great European partners. They're even listed in Frankfurt. They're dual-listed, as well. I think it's a quality story, and a good space, and it is the missing piece that these buy now, pay later guys, and all these emerging neo-banks need is to you know your client and get the identity right and make sure there's no anti-money money laundering issues at play. I think this is a buy.
Matthew Kidman: We don't want anti-money laundering issues in any company, but there's a lot of goodwill attached to this company, which is maybe just close to breaking. Buy, hold, or sell?
Michael Wayne: Yes, I've got to buy on this one, as well. It's a very interesting business in that it started off just focusing on businesses that are regulated AFSLs, so looking at things like CFD providers, binary options, currency forex, all that sort of stuff. They started off just purely that know your customer style business, but they've evolved into one of these neo-banks looking to provide not only identification, but e-deposits. They're also looking at payment processing now. They're in discussions with the likes of AmEx and Diner's Club as well, so they could very much have an integrated platform, which surpasses many of the big four banks. A very exciting business, so I've got to buy on that one.
Matthew Kidman: Okay. This used to just shoot space junk, now they sell stuff to the military.
Michael Wayne: That's right.
Matthew Kidman: Electro Optic System Holdings, just to give it a hard name. Buy, hold, or sell?
Michael Wayne: I'm probably going to hold on this one. They've won a lot of contracts recently. Their revenues are looking like they're going to jump up significantly, but the question is whether or not that can be sustained going forward or whether it's going to be quite lumpy. It's involved, as you say, in shooting space junk or at least monitoring it out in space-
Matthew Kidman: We all do a bit of that, don't we?
Michael Wayne: Yes, from time to time. But also involved in the military and things like gun turrets and lasers which are involved in that process. But it's a ... I don't think it's as solid as the other two at this point. The management team, I will say, has some overlap with Audio Pixels. Audio Pixels is a business which has really drummed up a lot of broker interest, a lot of market support, built up liquidity in the share price from not much, so they might be able to do the same thing here. I think we're seeing the early signs of that. Whether or not the product can be delivered end of the day is another question.
Matthew Kidman: It's always been coming with EOS. Is it here now and it is a buy, hold, or sell?
Henry Jennings: I think it's still to come. But I think it's a buy from me. These guys make sexy sights, basically. They're into counter drones as well, now. It's a big market and we're seeing, at the moment, some very significant M&A activity in the US between some big players. These guys have got cutting-edge technology. They're building a plant in the US so they can kind of get around that, "Oh, we're Australian. No, we're not. We're actually producing in the US." I think it's a pretty good story, but it is lumpy. It tends to ... interest waxes and wanes. It's not very liquid, so it tends to go for six months without doing anything, then it comes out with some really good results. Then it jumps up $0.50 or $1.00, and I think we're going to continue to see that announcement-driven share price as opposed to research-driven because there's not a lot of people that follow it.
Matthew Kidman: Okay. You've been looking around, discovering. What have you discovered for us? What's one stock?
Henry Jennings: There's one stock I like, which is Mach7 Technology. M7T is the code. It always gets complicated when you have numbers coming into codes, but these guys are providing digital data management for hospitals. This is something that's becoming more and more necessary for hospitals because they need to have all those records to be able to be accessed by doctors at all times. They've been picking up some good contracts recently. They're only a tiddler. They're only $70-million market cap, but they have been doing quite well recently, picking up some good contracts, and they're starting to make some good inroads.
I think this is one to watch as we move towards a world where a doctor can pick up an iPad and that's what they have all the records there in high definition, and these guys should be at the forefront of that.
Matthew Kidman: All right, Michael, what have you found on your treasure hunt?
Michael Wayne: So, ELMO the HR software providers. It's a business that's not too dissimilar to Xero in its business model. Software as a service, and there's a lot of management and founder involvement still, on the board level, but also at the shareholding level. I think the board, as well as founders, are in more than 40% of this business. They've got a couple of very large customers, people like the ATO, for instance, Macquarie University, et cetera. But it's really the smaller to medium-sized businesses that they're targeting, between 50 and 200 employees, because at the moment, they've got about 9% of the market share. They are growing their market share, which is impressive.
But what we really like about them is the fact that they've got current customers using sort of two and a half, three, out of 13 of their modules in their offerings. The idea is they can cross-sell to those existing customers, as well as go out and find new customers and grow organically that way. ELMO is one to keep on the list. Liquidity is not that great at the moment, but there is certainly interest starting to build.
Matthew Kidman: On our journey of discovery, we found a field of dreams.