Buy Hold Sell: Hunting for quality in ASX small and mid-caps, and 4 cracking picks

When you're looking to buy something, one of the first things you ask is: what's the quality like? 

No one wants something that’ll fall apart or blow up in their face. One of the big bugbears is reliability - most people want something that’s built to last when they’re putting their money into it.

Same goes for stocks. The word quality gets bandied around a lot, and while there’s a broadly accepted definition, it can mean different things to different people. 

Different strokes for different folks.

To unpack what it means for those hunting in the small and mid-cap space, Livewire's Anna Dadic is joined by Will Granger from Airlie Funds Management and Marc Whittaker from IML.

In this episode, they will discuss why quality becomes so significant in market turbulence and share their current favourite high-quality small and mid-cap stock names. 

Please note this episode was filmed on 7 May 2025.

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Edited Transcript

Anna Dadic: Hello and welcome to Livewire’s Buy Hold Sell. I’m Anna Dadic. When markets go sideways, as they did recently, investors often pivot to quality - but quality can mean different things to different people. To unpack what that means in the small and mid-cap space, I'm joined by Will Granger from Airlie Funds Management and Marc Whittaker from IML. Gents, let’s dive right in. Will, let’s start with you. How do you define quality?

Will Granger: When we think about quality, we’re really thinking about businesses with durable competitive advantages - companies that are protected from competition and can grow at attractive rates on incremental capital. The key metric here is return on invested capital. If a business has a long-term track record of generating strong returns on capital, that usually indicates it has some kind of economic moat. We then try to understand that moat to determine whether it’s sustainable.

Anna Dadic: Marc, same question for you. How do you think about quality?

Marc Whittaker: I’d echo Will’s points on competitive advantage. We also focus on the resilience of earnings - recurring earnings are something we specifically look for. We're after companies that can steadily build earnings over time.

In the small and mid-cap space, management is critical. In large caps, you could argue - CEOs may disagree - but if you’re running Telstra or CommBank, day-to-day decisions don’t drastically change the company’s trajectory. But in small and mids, leadership really matters. We spend a lot of time understanding the management team and board, and how they work together.

Anna Dadic: Marc, staying with you - when markets are volatile, everyone pivots to quality. Why do you think that is?

Marc Whittaker: In theory, we’d all like to own quality stocks all the time. But the reality is, quality often comes with a high price tag. So if you’re a value investor or focused on quality at a reasonable price, opportunities can be rare.

When markets pull back, like we’ve seen recently, that volatility creates buying opportunities. You can get high-quality businesses - ones that usually trade at premium valuations - at more attractive prices. These are solid franchises with long-duration earnings and strong cash generation. And as Will would agree, when markets draw down, quality stocks don’t always hold up better - but that’s the opportunity. You can step in and buy great businesses at fairer prices.

Anna Dadic: Will, why quality companies now? How do they typically perform during periods of market stress?

Will Granger: We don’t spend too much time trying to pick stocks based on short-term market conditions. We’re long-term investors at Airlie, and we always take a three to five-year view. That said, in times of market disruption, it makes sense that investors would lean toward quality. These businesses tend to have resilient earnings streams and can thrive in most environments.

Anna Dadic: What are the key characteristics you look for when investing in a quality stock?

Will Granger: As I mentioned, the track record is critical. We also have a strong focus on management. We prefer owner-managed or founder-led businesses - they often take a long-term view and are shareholder-friendly in their capital allocation. We also like businesses with strong balance sheets. That protects you on the downside and provides optionality on the upside. And of course, valuation is always a key factor.

Anna Dadic: Marc, what are your non-negotiables when it comes to adding a quality name to your portfolio?

Marc Whittaker: I agree with Will on all of those. I’d add that resilience of end demand is crucial. If a company provides something people truly need, it’s more likely to weather downturns. We look closely at elasticity of demand - how sensitive customers are to price or market conditions. And in the small and mid-cap space, even small changes in direction or strategy can have a big impact over time. So we pay very close attention to management and execution.

2 top-notch smalls and 2 elite mids

#1. Regis Healthcare (ASX: REG)

Anna Dadic: Let’s get to the fun stuff. I’ve asked each of you to bring along a high-quality small-cap and mid-cap. Marc, let’s start with your small-cap pick.

Marc Whittaker: I’ve gone with Regis Healthcare, which has performed well recently. It’s a leading aged care provider in Australia. With an ageing population, demand is increasing. But supply hasn’t kept up - there’s a lag there, and that benefits providers like Regis.

They’re a scale player, which is critical given regulatory and compliance requirements. Their balance sheet is very strong, giving them flexibility to either buy or build new capacity. And the management team, Linda and Rick, are doing a great job. The company’s in a strong position with plenty of upside still ahead.

#2. Gentrack Group (ASX: GTK)

Anna Dadic: Will, can you top that? What’s your high-quality small cap?

Will Granger: We really like Gentrack. They provide enterprise software to the airport and utilities sectors. These types of businesses tend to have low customer churn because it’s costly and disruptive to switch providers. That gives them highly predictable, annuity-style revenue. Gentrack has been around for over 35 years, which is rare for a small-cap tech business. It’s a very durable model.

#3. News Corp (ASX: NWS) 

Anna Dadic: What about your mid-cap pick?

Will Granger: I think News Corp fits the bill. They own some really high-quality media assets. About 30% of earnings come from realestate.com.au, which arguably has the best pricing power on the ASX. Another 45% comes from Dow Jones, which includes The Wall Street Journal and a robust B2B subscription business. The remaining 25% is mostly HarperCollins, the world’s second-largest consumer book publisher. It’s an oligopoly market with great long-term economics.

#4. Reliance Worldwide (ASX: RWC) 

Anna Dadic: Marc, bring us home - what’s your high-quality mid-cap choice?

Marc Whittaker: I’ve gone with Reliance Worldwide. They make behind-the-wall plumbing fittings - basically, connectors for pipes in bathrooms and kitchens. They have leading positions in the US, Australia, and the UK. It’s a fragmented market, and they’ve carved out a solid share.

They’ve got a strong balance sheet and a good track record of growth through M&A and new products. Management has been proactive, especially with tariffs and supply chain diversification. They've been shifting production out of China for years, and just announced a strategy that will make them tariff-neutral in the US by FY2027.

Another thing I like: plumbing is resilient. About 70% of their US business is in repair and remodelling. If something breaks, it has to be fixed - that demand doesn’t disappear. And the stock's trading at just 14x next year’s earnings, which looks very attractive.

Anna Dadic: That’s all we have time for today. If you enjoyed this episode of Buy Hold Sell, make sure to give it a like, and don’t forget to subscribe to our YouTube channel - we drop fresh content every week.