Buy Hold Sell: Can the small-cap rally last? (plus ASX 4 stocks to watch)

If you've been following the story of small caps for a while, you would know that as early as 2024, some investors were talking about a recovery in small caps given the performance gap relative to their larger peers. 

For a good period of time, that promise went unfulfilled. But good things come to those who wait, and in 2025, small caps have staged a genuine comeback - so much so that they’re now outpacing their large-cap peers year to date.

The question now is: can it last? And just as importantly, what could derail the momentum?

Livewire's Chris Conway put those questions and more to James Nguyen from Tyndall Asset Management and Shaun Weick from Wilson Asset Management. 

In this episode, James and Shaun also share which sectors and themes still look compelling in small-cap land, a couple of stocks they're most excited about, and a couple more that are keeping them up at night. 

Please note that this episode was filmed 5 November 2025

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Edited Transcript

Chris Conway: Hello and welcome to Livewire's Buy Hold Sell. My name is Chris Conway. Small caps have roared back to life in recent months, outpacing their larger cap cousins and capturing the market's attention. But can the rally last or is it running on fumes?

To answer that question and a couple more, I'm joined by James Nguyen from Tyndall Asset Management, and Shaun Weick from Wilson Asset Management. Gents, I'm going to start hot. It's the biggest question that we need to ask and answer. Can the rally in small caps continue? James, I'll come to you first.

Can the rally continue?

James Nguyen: My view, absolutely. Reason being is that even though small caps have outperformed large caps by 13% this year, rewind back to 2021 when interest rates first went up, small caps have underperformed large caps materially, and so they still underperformed large caps by over 20% despite the outperformance this year. So I think there's still a long runway for small caps to go.

And the second point is also that small caps are generally more leveraged to the economic cycle. And where we are in the cycle at the moment, I think the Australian economy is proving to be rather resilient. In addition, where we are from an interest rates, yes, we've had a pretty hot CPI number. But that said, my view is that all that has done is push a further rate cut to the right, rather than eradicate a rate cut. So I think the ingredients are there for the small cap rally to be sustained.

Chris Conway: Shaun, do you echo those sentiments?

Shaun Weick: Yeah, I'd echo James's comments. From our perspective, we think underlying earnings momentum is improving in the small cap space and particularly is far more attractive, we think, versus the larger end of the market.

What I'd also say is too, generally, when animal spirits are lifting in the market and you're seeing risk appetite and sentiment improve, you will see liquidity flow down to smaller companies. And we're seeing really good signs of that, particularly over the last few months. So we think that provides a good catalyst to continue to sustain the outperformance.

We're also seeing, generally, capital markets activity improve in the smaller end of the market. Equity raisings that are delivering earnings accretive acquisitions are being really well received. So we think there's some good signs out there that can see the rally sustain.

And finally, from a valuation point of view, small caps are trading around 10% discount to the broader market. In good times, they can trade at 20 to 30% premiums. So yeah, we think there is scope for expansion.

What could spoil the party?

Chris Conway: Pretty bullish points there, gents, but we'll take the other side of the equation now. So what could derail the momentum? Shaun, I'll stay with you.

Shaun Weick: For us, it's really just watching where our interest rates go directionally from here. And clearly, there's quite a strong focus around inflation here domestically and also in the US. But our general view from here is rates may be on hold for a period of time before moving lower again in 2026. And we think that backdrop is still conducive for small caps, particularly with improving earnings momentum. So that's what are looking out for.

Chris Conway: James, what about you? What do you think could derail the momentum?

James Nguyen: As a starting point, I think valuations rarely kill a bull market. Generally, it's an exogenous shock that will put an end to the bull market. And by their very nature, exogenous shocks are pretty hard to predict.

That said, I think the most probable likelihood if we do get a shock, is a consumer-led recession from the US, not Australia. So I recently came back from the US, spoke to a lot of retailers, spoke to a lot of QSRs or restaurant operators, and I spoke to a lot of debt buyers. And consensus is that the US is slowing and probably at the lower end. I think the most insightful meeting was a meeting with Chipotle, where they said the last six months have seen a slowdown in households with a $40,000 income or lower, really seek value. And what they've seen the last couple of months is that households up to $100,000 have started to seek value and started to pull their heads in.

So whether that's a canary in the coal mine, I don't know. And it's definitely not our base case - that the US will enter a deep recession - but there are signs there that the US economy is slowing.

Most appealing themes and sectors

Chris Conway: We'll shift gears now and talk to the gents about the sectors they are finding appealing amid the current small cap rally. James, I'll stay with you. Where are the hot areas at the moment?

James Nguyen: So in the last couple of months for us, the hot area or the thematic that we're attracted to is the resilience of the Australian consumer. We've been running a material underweight in the Australian consumer for the past 12 months, but we've really closed that gap.

Yes, a lot of the retailers have run pretty hard. I never thought I'd be sitting here saying that I own a furniture retailer trading on nearly 30 times earnings in Nick Scali and I didn't think I'd own a car dealership trading on nearly 30 times earnings in AP Eagers. But the Australian consumer seems to be pretty resilient and I think if you dig a bit deeper, there are plenty of other opportunities within the consumer discretionary that are trading a lot cheaper, like a Baby Bunting or a Peter Warren where the turnaround is only just beginning.

Chris Conway: Shaun, what about you? Areas, sectors that you're finding appealing at the moment?

Shaun Weick: Yeah, there are probably a couple of key themes for us. I'd echo James' comments in terms of the interest rate sensitive names that are domestically focused continue to look attractive to us. So, the auto dealers, I'd highlight Autosports Group. Now AP Eagers is about to exit and go into the 100 index. We still own the stock, they've got a great opportunity in Canada. But we think investors will gravitate now towards the smaller end. MotorCycle Holdings fits into that bucket as well.

We like the land lease community space, so GemLife, which recently listed back in May. Ingenia we think looks good. Cedar Woods, their recent update highlighted pre-sales visibility really out into 2027. So the housing market's clearly running with some good momentum.

Another area we continue to like is the mining and industrial services space. Clearly, there's strong tailwinds there from commodity prices. Infrastructure spend is continuing to remain strong. Defence is obviously an area that's been highlighted more recently too. So we think the likes of a Tasmea, SRG, towards the lower end a GenusPlus, Vysarn, a little company called Mayfield Group we think has got really good momentum in that space.

And then finally, just the technology sector in general. We think there's a great ecosystem of companies here in Australia at the moment. Life360 we've owned for a long time. We think the market's just materially underestimating the PET and advertising opportunity.

And then some other selective plays like Megaport for exposure to the AI infrastructure theme and then also Catapult within that sports wearable space. We just think the market's missing the ARR acceleration and I suppose it could play out with the IMPECT acquisition.

So you've got to be selective and be active. But yeah, we think the market still looks like it's throwing out some good opportunities across those areas.

Chris Conway: The gents have both mentioned some stocks there, but I'm going to ask them to sharpen their focus now and ask them about the small cap that has them most excited and equally the one that is keeping them up at night. So Shaun, I'll stay with you. What's one that's got you most excited?

One small cap that has you most excited

GemLife (ASX: GLF)

Shaun Weick: Yeah, I mentioned one of them, which is GemLife. So this is a pure play builder, developer, owner-operator of land lease communities along the eastern seaboard. So management there, we think, are among the best listed on the ASX within the small cap space, led by Adrian Puljich and also the CFO Ashmal Thakrit.

So what we'd say from here is your fundamentally leveraged to what is a structural shortage in housing supply. Clearly, there's good tailwinds there in terms of downsizing and people seeking more affordable housing. They delivered their inaugural prospectus result at the half year. Earnings are tracking 8% ahead of prospectus forecast. We think they can deliver that at least again when it rolls around to the full year.

And then you're effectively looking at ASX 300 index inclusion in March, which is becoming an increasingly powerful tailwind across the small cap space. So yeah, we think that one still sets up really attractive. And the land bank that they've got essentially funds them to 4x the size of their business. So we think long term, there's a lot of upside in that one.

Chris Conway: Yep. So GemLife for you, Shaun. James, what's one that's got you excited?

Vault Minerals (ASX: VAU)

James Nguyen: It's an interesting one in that we've been reducing our gold exposure; so we've been running 15-16% and gold at $4,000 an ounce. The contrarian in me says that you should be taking profits. So we've been selling gold and so now it's about 11-12% of our portfolio.

But within that, one stock that we're very convicted in is a company called Vault Resources. And the reason being is threefold. One is that its balance sheet is immaculate. The second is basically the free cash flow growth, going from 9% to 19%. And what really excites me about the free cashflow growth is generally speaking, whenever you see a resource company with that type of free cash flow growth, it's because they're in development phase or they're in ramp up phase and you're taking on a lot of operational risk. In the case of Vault, that free cashflow growth is all because of the hedges rolling off. So all you'll have to do is be patient, wait 18 months, and cashflow more than doubles.

And the third thing I am drawn to Vault is that they're going through capital management. And what I mean by that is a lot of resource companies when they generate free cashflow, we tend to get excited, but we shouldn't because you never get your hands on that cashflow. Reason being is that mines are finite life. Executives have an incentive to essentially acquire more assets to, one, grow their assets, or two, to keep their jobs. In the case of Vault, the free cashflow they're generating, they've got a 10% buyback. And my view is that that shareholder return will be a recurring theme as cashflow continues to grow.

A name robbing you of sleep at night

Chris Conway: Two strong picks there. Now the one that's robbing you of sleep, James, what's keeping you up at night?

Web Travel Group (ASX: WEB)

James Nguyen: The one that I stay awake at night is a company called Web Group. And even though it's the smallest active position in my portfolio, it's one that I worry about. The reason being that in the last 12 months, it's been through a pretty rough patch and the management has really disappointed on margin revenue compression. And it's really been driven by own goals.

In defence to the CEO John Guscic, he's looked to address that and he's made personnel changes. The reason why it keeps me awake is threefold. First is that the business itself is very cyclical. Bottom line is travel is consumer discretionary. The second is that travel is also exposed to geopolitical risk and we see during the Ukraine issues with Russia that it impacts businesses like Web Group. And the third is given the missteps they've had, I genuinely don't know how much goodwill John has with the investment community anymore. So I think any further missteps will be doubly punished.

That said, the business is a capital light business. It trades on 15 times earnings and the medium term earnings growth is 15%. So I don't know how much is baked into the numbers. I think a lot of that pessimism is captured in the numbers, but I still stay awake a lot over that name.

Chris Conway: Shaun, what about you? What's one that's keeping you up a bit?

Iress (ASX: IRE)

Shaun Weick: Oh, I've got a 14-month-old baby, so that's keeping me up a fair bit. But yeah, from a stock perspective, it's Iress. There are five bidders in the data room. The press have been reporting that of recent times, and the company has come out and confirmed it. I guess it's keeping me up because we've been here before. Back in 2021, they had a bid from EQT at $15.90. Stock is trading around $9 at the moment, so probably would've been wise to have hit that back then.

So yeah, we think obviously there's a decent chance that the business will get taken out, given that there's competitive tension in the data room. But for us, it's probably just trying to work out what level of control premium is being built into the share price at the moment. And if that does fall through, what's the right level to be playing the stock?

But the incoming CEO, Andrew Russell, we rate very highly. He done an extremely good job at Bravura in terms of right-sizing the cost base and driving the free cash flow and improving the top line. We think the playbook's the same here, so it's not all doom and gloom if the bid does fall through. We think there still, really, is a good operational turnaround opportunity here. But yeah, it's one that's definitely keeping me up here and there.

James Nguyen: I'd add that we actually own Iress as well and it probably would've been my top at keeping me up awake at night. But yeah, Andrew Russell there I think gives us a bit of comfort.

Chris Conway: There you have it, ladies and gentlemen, a couple for the watchlist and a couple to watch even closer. If you enjoyed this episode, make sure to give it a like and don't forget to follow our YouTube channel. We're adding lots of great content every single week.