Buy Hold Sell: 5 ASX small cap standouts

Equity investors, quite rightly, are looking beyond large caps for opportunity. There's only so much Commonwealth Bank and Magnificent 7 you can have in a portfolio before things start to look top-heavy. 

But moving down the market cap spectrum does not have to equal higher risk - not if you know where to look. 

Whilst small-cap names are often under-researched and overlooked, this can create opportunities for outsized returns. The key is to have a process for unearthing the mispriced or underappreciated gems. 

So, in this episode, Datt Capital’s Emanuel Datt and Yarra Capital Management's Michael Steele share what they are looking for when mining the small-cap space, before putting their method to the test by analysing three small-cap names. 

For good measure, they each share a diamond in the rough small cap that they are backing right now. 

Please note this episode was filmed on 7 May 2025.

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Edited Transcript

Chris Conway: Hello, and welcome to the Melbourne Special of Livewire's Buy Hold Sell. My name is Chris Conway. Small-caps are often under-researched and overlooked, creating opportunities for outsized returns. In this episode, Datt Capital's Emanuel Datt and Yarra Capital's Michael Steele will share how they identify mispriced or under-appreciated small-cap gems and what metrics or catalysts they look for. Gents, welcome to Buy Hold Sell.

Michael, I'll start with you. There are lots of small-caps out there. Can you just share a little bit about your process and how you find the gems?

Hunting for small-cap gems

Michael Steele: Good to be with you, Chris. In terms of the process, we use a number of factors to screen for opportunities in the small companies market, looking at revenue growth and durability, does the business have a sustainable cost base, the free cash flow potential of the business, in particular considering the capital expenditure, management quality and balance sheets and valuations.

So there's a range of things we consider. And then we go through a due diligence process where we talk to a range of industry experts, whether it's suppliers or competitors or customers, to form our own investment view. And often we know these businesses very well and we're looking for an opportunity where they have a short-term misstep and that creates a great buying opportunity at depressed prices.

Chris Conway: Emanuel, what about you? Share a little bit about your process.

Emanuel Datt: Yeah, sure. So I agree with Michael. We tend to focus on three key factors when it comes to screening. First, a product or service that has a clear utility and is perhaps superior to other larger competitors. The second thing is a management team that's capable of executing upon the plan and growing the business organically and making the right commercial decisions. And the third point was being able to finance that growth. So, a strong balance sheet, profitable business model, all these elements are very important for small-cap success.

Key traits of successful small-cap companies

Chris Conway: Emanuel, I'll stay with you. You touched on a few of them there. But really, the key traits of a successful small-cap, what are you looking for?

Emanuel Datt: The most successful ones we've seen tend to have something that's very unique, and that in itself is something that's very valuable not only for the company itself but perhaps for others. And we've seen that so many times in small-cap M&A, where you've seen a company develop a great product or a great bit of intellectual property and commercialise it successfully and really disrupt and win market share.

Chris Conway: Michael, what about you? Standout factors in small-caps.

Michael Steele: Two standout factors in small caps are free cash flow generation and also management quality. So when we're looking at free cash flow generation, it needs to be sustainable or there needs to be a clear pathway to generating that sustainable free cash flow. So we're looking at revenue, durability, cost-based sustainability and the capital intensity. And there's a number of benefits of focusing on that free cash flow generation, but some of those could include the fact that you avoid concept stocks, which can see their equity value disappear very quickly, and also it reduces the probability of equity raisings and dilution.

The second one is management, and that is critical. Do the management have a good track record and do they have sufficient alignment, in particular through equity?

Small-cap stocks

Chris Conway: We'll shift gears now, ladies and gentlemen. We're going to talk about some of the small-caps that are interesting right now. We're going to start in a very hot segment of the market. It is, of course, gold. That has been flying at the moment. Michael, we're going to talk about Genesis Minerals. I'll come to you first. Prolific in the Leonora region in WA, is it a buy, hold, or sell for you?

Genesis Minerals (ASX: GMD)

Michael Steele (HOLD): Genesis is a hold. It has a very strong outlook in terms of production. They can more than double production over the medium-to-long term and extend mine life. They've got a position on the cost curve where they can improve, from the increasing volumes and also improving grades.

A notable factor with Genesis is the management team; a very high-quality management team, and that's very important with gold producers, where they can actually be quite difficult assets. But as the intro referenced, the sector has been very hot. You've seen Genesis increase its share price by over 150% over the last 12 months and it's now moved up to hold, in particular based on valuation.

Chris Conway: Yep. You stole my line, Michael. Well done. Emanuel, I was going to say up over 100% over the last year. It has been hot. Do you think this one has more to go? Is it a buy, hold, or sell?

Emanuel Datt (BUY): For me, Chris, I think it's a buy. And look, I agree with everything that Michael has said. I think that there's significant latent optionality in the Genesis portfolio itself, and notably, we've seen the company acquire a big, four-million-ounce portfolio from Focus Minerals. So that makes the total mineral endowment about 18 million ounces, off the top of my head. And I think there's optionality in terms of being able to significantly increase their rate of production over what the company are messaging at the moment.

So I think for me, even though it's a bit of a speculative buy, I guess, more than anything, the foundations for the gold price, in my view, are still very strong. So that is why it remains a buy for me.

Nuix (ASX: NXL)

Chris Conway: Next up, we're going to talk Nuix. As I understand it, gents, this one had a bit of a rough start to its life on the ASX. It provides investigative analytics and intelligence software. Emanuel, I'll stay with you. Buy, hold, or sell?

Emanuel Datt (HOLD): Nuix is a hold for me. Why is that? As you mentioned, it floated at a very lofty premium and has gone through a fair bit of change over the past five or so years. I would say Nuix is a hold because the business does have its challenges. It does have positive aspects of the business, such as very sticky government clients, for instance. However, it is at the behest of a long sale cycle. Revenue growth is very much dependent on that, and for SaaS-style businesses, that's your lifeblood, basically.

So for us, it's a hold because the company have articulated and withdrawn guidance. However, the valuation has come off significantly, and that's why it's a hold for us.

Chris Conway: Again, took the words out of my mouth, Emanuel, down 60% so far this year. Michael, any value there? Is it a buy, hold, or sell for you?

Michael Steele (SELL): Nuix is still a sell for us. Nuix has struggled to grow revenue, and we've seen that with the recent downgrades. There's a number of challenges to the revenue outlook, and we think that'll continue to be challenging. In particular, it's quite a mature industry where it's hard to win additional new customers, and we've seen that also with the new product, it hasn't resonated, and they have an element of effectively realising revenue upfront by pulling forward multi-year contracts. So we're cautious on the revenue outlook.

And this is a business that has been around for over 20 years. It's got a large number of customers, but it has struggled to get the unit economics right and it still doesn't generate meaningful earnings or free cash flow. So we remain a sell on Nuix.

Vulcan Steel (ASX: VSL)

Chris Conway: Next up we're going to talk about Vulcan Steel; a producer and distributor that has actually seen some insider buying of late. Michael, I'm going to stay with you. Are you buying, along with those insiders?

Michael Steele (HOLD): Vulcan Steel is a hold for us. There's no doubt there's a strong earnings growth outlook in the longer term. In particular, when you look at the cyclical opportunity, the businesses across Australia and New Zealand, the markets have been very weak, in particular in construction. So there's clear cyclical earnings upside. They also have an opportunity to expand market share in their core products, and also some of their more recent products, such as aluminium, supported by a strong management team, and the ability to consolidate the industry longer-term as well.

The reason for the hold, though, is that earnings expectations have clearly got some challenges around the macro uncertainty and the cycle taking longer to recover. There's some natural lags in the construction industry that makes the forward expectations for earnings look too high and cause us to be a hold.

Chris Conway: Emanuel, down 8% over the past year. Not too bad, but not great. Buy, hold, or sell for you?

Emanuel Datt (SELL): Vulcan Steel would be a sell for me. The rationale for that is that, as Michael mentioned, there's a very weak macroeconomic environment that it has to fight, ultimately, and we're seeing significant struggles in residential and commercial real estate new starts. And to me, that's very heavily linked with steel and aluminium consumption, which is obviously what Vulcan's bread and butter is. You've also got the company fighting against the increasing costs of doing business.

Guest picks

Chris Conway: Ladies and gentlemen, my favourite part of the show. I've asked the gents to bring along a diamond in the rough small-cap, one that they're backing. Emanuel, I'm going to stay with you. What is your pick for us?

WA1 Resources (ASX: WA1)

Emanuel Datt: My diamond in the rough is WA1 Resources. So WA1 Resources has delineated the world's second-best niobium deposit. So far, they've delineated about 200 million tonnes of 1% niobium, which is a very large, multi-generational, tier one asset in a future-facing critical metal.

So this is a very scarce commodity. The vast majority of production comes out of Brazil. And WA1 Resources, the project is actually located in Western Australia, so the world's best mining jurisdiction. And we would view this as being owned by one of the majors over the longer term.

Chris Conway: Right. Take-over target potential?

Emanuel Datt: Yeah, absolutely. And so the company are in the process of updating their MRE, doing all the critical path items as they progress the project down the path of commercialisation, going through the various studies and permitting and all the rest of it. So that's one of our high-conviction picks for the next 12 months.

Chris Conway: Just a quick question. Niobium, what is that used for? For us rookies that don't understand what it gets used for.

Emanuel Datt: So its primary use is in steel making for specialty alloys of steels. But, however, there are emerging applications in battery technology - fast-charging.

Chris Conway: Michael, what have you brought along for us today?

Centuria Capital (ASX: CNI)

Michael Steele: My diamond in the rough buy is Centuria Capital, the property fund manager. When you look at Centuria Capital, approximately 50% of the current enterprise value is accounted for in their passive property ownership. So that provides clear downside support to the share price, and our view is the cycle is improving and those asset valuations will increase going forward.

The other 50% of the current enterprise value is what's attributed to the funds management business, and we believe that's significantly undervalued. In particular, they've got cyclical earnings upside for the funds management business. As inflows improve, we see performance fees improve, transactional revenues, and they'll also benefit from the value of the property going up as well, as it will support asset growth.

This is a founder-led business. It has attractive valuation metrics, a headline PE of only 14 times for next year, and it has dramatically underperformed the key peer, Charter Hall, showing relative value as well.

Chris Conway: Michael, just a question there. How much does the falling interest rate environment play into the thesis?

Michael Steele: It's a multi-dimensional thesis, but that is a major positive, and we're seeing some early signs of increased demand for the asset classes. Term deposits become less attractive, they're switching to property. And our view is we're at the start of a real cyclical recovery in those inflows.

Chris Conway: Well, there you have it, ladies and gentlemen, a couple of small-cap diamonds in the rough thanks to Michael Steele and Emanuel Datt. If you enjoyed that episode of Buy Hold Sell, 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.