Buy Hold Sell: The 10 most-tipped small-cap stocks

In case you missed it, Livewire's Ally Selby spoke to John Deniz from Paragon Funds Management and Josh Clark from QVG Capital for their thoughts on the hottest small-cap stocks for 2022. Plus, they also named the #1 stock they are backing over the year ahead. You won't want to miss this one. 
Buy Hold Sell

Livewire Markets

It's no secret Livewire readers love small caps. That said, your most-tipped smalls for 2021 took quite the tumble. These reader favourites fell 14% in a year when the benchmark, the S&P/ASX Small Ordinaries, lifted 12.75%.

This year, however, your list is uncharacteristically resources heavy. In fact, four out of your 10 picks sit squarely in that sector. And with interest rates on the rise, and battery materials going from strength to strength, you could be onto a handful of winners.

In this blockbuster episode, Livewire's Ally Selby was joined by two all-star long-short managers, John Deniz from Paragon Funds Management and Josh Clark from QVG Capital. Our two fundies lend their expertise to your 10 favourite small-cap stocks and open up about some of the major changes they have made to their portfolios in 2022.

Plus, which of the following – Bitcoin or Aussie housing – is most likely to outperform this year? You'll just have to watch to the end to find out.

Note: This episode of Buy Hold Sell was shot on Monday 24 January 2022. You can watch the video, listen to the podcast or read an edited transcript below.

Edited Transcript

Ally Selby: Hey, how are you doing, and welcome to Livewire's Buy Hold Sell. I'm Ally Selby and we have an absolutely jam-packed episode for you today. In case you missed it, we surveyed thousands of Livewire readers in December to see how you are thinking about markets in 2022. So in this episode, we'll be taking a look at one of the interesting findings from that survey. Of course, it wouldn't be Buy Hold Sell without us asking our pros to analyse some of your favourite stocks. In this case, it's your top-tipped small caps 2022. And for a bit of fun, we'll also be asking our fundies to choose whether they think Bitcoin or Aussie housing will outperform over the year ahead, but we'll get back to that later.

Today, we are joined by John Deniz from Paragon Funds Management and Josh Clark from QVG Capital. Let's jump straight into the survey. 30% of our readers think that right now is a good time to be reducing exposure to risk assets. John, I might start on you. Do you agree?

John Deniz: No, Ally. We actually think quite the opposite. We're bullish on our strong thematics and fundamental stock picks. Whilst we're expecting volatility this year, just like we're experiencing this month, we expect this to be more than superseded by the globe's decade-plus long strong micro drivers from de-carbonization and electrification.

Ally Selby: Awesome. Over to you, Josh. Are you bullish on equities or do you think that you should be reducing your exposure to risk assets over the year ahead?

Josh Clark: Yeah, I wouldn't agree with that sentiment, that you should reduce exposure to risk assets. In fact, I don't really think there are many good times to be reducing exposure to risk assets. Really you want to do it when one, you need the money, and that's a very personal question. So you've got to answer that one for yourself. Or two, if your strategy is to time the market, and from my experience, it's not the most lucrative strategy that I've seen. It's incredibly difficult. 

Ally Selby: I'd love to know, John, are there any significant changes you've made to your portfolio in recent times? How does that compare to your portfolio 12 months ago?

John Deniz: Well, given the changing macro environment and Fed tightening, for the last few months we've been progressively increasing our exposure to resources like nickel and old energy oil and decreasing our exposure to long-duration tech stocks.

Ally Selby: Over to you, Josh. Have you made any crazy changes or massive changes to your portfolio in recent times that looks completely different to how your portfolio looked 12 months ago?

Josh Clark: There's one thing that comes to mind. I'm glad you corrected yourself and said massive, not crazy, because we would never admit to doing anything crazy. But the most significant change in the portfolio relative to say a year or maybe even 18 months ago was, at that time, the market was very much risk on. Everyone wanted to own tech at any price, exciting stories and high beta was working - the more speculative, frothy type stories. And so really we were very careful about shorting any of those names and essentially we stayed away.

But I think we're seeing a bit of a market pullback this month and some of those companies eventually they're going to have to execute to maintain their market caps. And I think that time is getting closer and we're seeing it in market sentiment. So, the big difference would be the type of stocks that are in our short book now. And some of those more frothy speculative names are starting to enter the short book. 

Ally Selby: Okay. Lets' kick off with your top-tipped stocks for 2022. First up, we have your most-tipped small cap for the year ahead, it's Poseidon Nickel. Its share price rose nearly 60% in 2021 on the back of strong demand for battery materials. John, I might start on you. Is it a buy, hold or sell?

Poseidon Nickel (ASX: POS)

John Deniz (HOLD): It's a hold, Ally, and only because of nickel's strong fundamentals and likelihood for much higher nickel prices this year, where the punters are likely to be able to throw darts at any stock and do well. However, we don't rate Poseidon's tied assets at all, and we don't rate their Silver Swan and Golden Swan resource discoveries. They're tiny. They lack any scale potential. And they're also getting very deep, which means they'll be fairly expensive to exploit.

Ally Selby: Over to you, Josh. Twiggy Forrest actually owns a 10% stake in this stock. Could that give investors confidence? Is it a buy, hold or sell?

Josh Clark (SELL): Yeah, it potentially could. I think Twiggy owns some cows, so I wouldn't recommend that everyone runs out and buys cows. Back to Poseidon. My view is not dissimilar to John's, albeit maybe I've got a bit less conviction around the nickel price. So my understanding of the asset is that that ground has been picked over for over a decade now and no one's been able to get it to work successfully in the past. So that speaks to some of the challenges that they'll have to get it up and running, or at least in a commercial sense. 

The other thing that sticks out I think is the grades appear to be a bit lower than peers. So that obviously adds sensitivity to the nickel price risk, whether it's to the upside or the downside. And probably the other point to make, I think, is it just means higher throughput through the mill and they are older, refurbished mills. So there are a few things that can go wrong there, so Poseidon is a sell for me.

Life360 (ASX: 360)

Ally Selby: Next up we have Life360, a family tracking app based in the US. Josh, I'll stay with you. Is it a buy hold or sell?

Josh Clark (BUY): My opinion would be Life360 is a buy. There are a few things to like about the business. 40% plus revenue growth rates is obviously nice. There are a few tailwinds in there at the moment. It's proved that the business can generate some operating leverage should they choose to pull back on the reinvestment within the business. So that's also positive.

And I think the other thing that I like about it is the founder management seems to understand how to create value in that stock and that is to create value for customers. So adding more features, benefits and products into the bundle should reduce churn. And then churn gives you a couple of nice things - it reduces marketing spend to acquire more customers and also creates greater lifetime customer value. So I think that one's heading in the right direction and I'd call that one a buy.

Ally Selby: Over to you, John. Life360 just acquired location tracking hardware provider, Tile, and it also wrangled its way into the ASX 200. Is it on its way up? Is it a buy, hold or sell?

John Deniz (HOLD): Ally, it's a hold for us. We owned 360 and it was quite a good winner for the fund. However, we largely exited the position ahead of the recent acquisition. We like the business a lot. They've developed the leading family tracking services platform. They've got a large market and they've delivered very strong growth of over 40%, even through COVID. However, rising rates cycle with no earnings, we just think it'll face headwinds. It's a hold for us.

Lake Resources (ASX: LKE)

Ally Selby: Next up we have Lake Resources. It was the best performing stock on our list. Its share price rose nearly 1163%. Can I do it again in 2022? John, is it a buy, hold or sell?

John Deniz (SELL): Ally, it's a massive sell. If you could get the borrow, you'd want to short it. You do not want to be left holding the bag as they go into the truth-telling phase. They've got a challenging direct lithium extraction brine asset, poor management, a really lightweight board and their joint venture partner, I'd almost call a joke. They paid nothing for their 25% interest, which is a big red flag and it says a lot about the asset.

But more importantly, the resource - it's got a substandard brine and the only way they'll make it work is by throwing lots of acids at it. And good luck with that. It's going to be an expensive process and we doubt they'll get anywhere near their overly promoted project parameters. And if you pro-rata the market cap up, the market is paying almost $1.8 billion for the asset, which is so expensive.

Ally Selby: John thinks it's a sell, but it just announced it was doubling its lithium production target at its flagship project. Over to you, Josh. Do you think it's a buy, hold or sell?

Josh Clark (HOLD): I don't think I'm brave enough to be as direct as John. I was going to put a hold on the stock. I mean, there's a lot that John's mentioned that I'd agree with - it's certainly going to be a difficult one. Doubling their production targets is really something that's on a piece of paper. What you want to see is them double their actual production. That's night and day.

The reason it's a hold, as opposed to being a bit more negative, is it really is a play on direct lithium extraction, which hasn't been done before. It makes them a pioneer and there is a risk that that saying is true that pioneers die with arrows in their back. But my understanding of their partner, Lilac Solutions, which is helping them with the technology side of the equation, is that they do have some IP there, they do have some legitimate backers like the energy vehicle for Bill Gates, BMW, SK Materials. And there is a material probability that they could make it work. So, on that balance, I think the stock's a hold.

Calix (ASX: CXL)

Ally Selby: Next up we have Calix, which is a sustainable material processing player. It saw its share price skyrocket 546% in 2021. Josh, staying on you, is it a buy, hold or sell?

Josh Clark (SELL): I think Calix is a sell. I'd love to see this become the next Australian success story. That said, I think there are a few risks in there that you're not necessarily getting compensated for. Obviously, it's a very early stage company. So not only do they not have revenue yet, but they don't quite have that product developed fully yet. So essentially, it's an early-stage science experiment. 

Ally Selby: Over to you John. Calix, is it a buy, hold or sell?

John Deniz (BUY): I get Josh's science experiment type comment. It's something I usually say about other rubbish stocks. But I don't agree here. I think it's a buy. It's one of the very few ways to gain pure-play exposure to the de-carbonisation theme. The growth pipeline is enormous and it's only strengthening with the carbon price breaking all-time highs of over 80 euros a tonne. The carbon mitigation tech actually works, so I wouldn't call it a science project anymore. And the other thing that I'm cautious of ordinarily is whether they can scale it up and it looks like they'll be able to do that. 

Vulcan Energy Resources (ASX: VUL)

Ally Selby: Next up we have Vulcan Energy, which recently made headlines after it was the subject of a short-seller report. John, I'll stay with you. Is it a buy, hold or sell?

John Deniz (HOLD): That short report was pretty lightweight and lacked substance. In any case, it's a hold for us, purely due to lithium's bull market strength. Hats off to Francis Wedin, the MD. He's taken this from nothing – a market cap of around $5 million – to about $1.4 billion fully diluted. But for us, on a price to fully diluted un-risked NPV of around a half, it's hard to see it doing much better than that given they do have an unconventional flow sheet and they're entering the riskiest part of the project's lifecycle. So it's a hold for us.

Ally Selby: Its share price soared around 275% last year despite reporting a loss of $10 million in FY21. Josh, over to you, is it a buy, hold or sell?

Josh Clark (SELL): I'd echo some of John's sentiment, I think Vulcan's a sell. It's certainly entering the high-risk phase and just the amount of complications that you can potentially encounter in a project like this really add up. And I don't think you're being adequately compensated.

So one, it's direct Lithium extraction. As we've talked about, it's never been done before. Then you are adding the complication of geothermal into that, in what's not necessarily new tech that they've built but an existing asset that they've acquired. I think the asset is loosely defined. And that's before you start thinking about some basics like environmental and other regulatory approvals, in what is a pretty meaningfully populated and beautiful part of Europe. So I just think the execution is going to be a lot more complicated than what a presentation might suggest. And for that reason, I think it's a sell.

Aussie Broadband (ASX: ABB)

Ally Selby: Let's move on to Aussie Broadband now. It listed in October 2020 and it's performed exceptionally well since then. Josh, staying on you, is it a buy, hold or sell?

Josh Clark (BUY): I think Aussie Broadband is a buy. It's an internet service provider, as most people would know. It's an incredibly competitive industry - I think there's something like 100 providers. But despite that, they've been able to differentiate themselves, essentially through operational excellence and catch some of their competitors napping, which has been really impressive and speaks to the motivation and quality of the team.

There's a lot of earnings coming through in the next two years that justifies the current valuation. And then I think you've also got a longer-term journey where they're transitioning it to higher quality business, bringing higher value business and SME customers into the mix that are also a lower churn. And also owning some physical infrastructure at high rates of return on that capital.

Ally Selby: Late last year it acquired Over the Wire for $390 million. How's that set to transform this telecom player? John, over to you, is it a buy, hold or sell?

John Deniz (HOLD): It's a hold for us, Ally. The recent Over the Wire acquisition was sizeable. And so we'd like to see the two businesses successfully integrated. We basically want to see the synergies realised and, keeping it simple, we want to see one plus one equals three. So until then, it's a hold for us.

EML Payments (ASX: EML)

Ally Selby: Next up, we have EML Payments. It's the only stock to make a return to your top-tipped small caps this year. John, staying on you, is it a buy, hold or sell?

John Deniz (HOLD): It's a hold, Ally. We need to see the regulatory issues with the Central Bank of Ireland definitively resolved. We do rate the stock though. Its share price is a long way off its pre-COVID highs. And for EML, unlike many of its tech peers, it's actually a beneficiary of rising rates. So it's a hold for now.

Ally Selby: As John mentioned there, its share price suffered during 2021. It fell around 24%. Josh, over to you, is it a buy hold or sell?

Josh Clark (HOLD): I can't help but agree with John on this one. I think EML is a hold. There are a few things to like about the business. One of them is obviously the intellectual property in their products, but also the operational leverage that you should get with incremental revenue dollars coming into the P&L in a business that has a very high gross margin.

The problem at the moment is there are a few question marks around what that revenue growth will actually be. I think if you were to list them, obviously the Central Bank of Ireland remediation looks like it's heading in the right direction, but hasn't yet been resolved. So there's a big question mark there. I think the return of foot traffic to the shopping centres and also the benefit that the gift card business should receive off the back of that is still a bit of an outstanding item. And one of their recent acquisitions, Nuapay, has got some pretty ambitious targets out there. Which at least from the outside looking in, look like they'll be difficult to meet. So I think you need some level of resolution on those three question marks before it can be a buy. So I think it's therefore a hold.

Brainchip Holdings (ASX: BRN)

Ally Selby: Staying with you, Josh. Next, we have Brainchip Holdings. Its share price is already on a run this year. It's up 122% year to date. Is it a buy, hold or sell?

Josh Clark (SELL): I think this one's fascinating and really unique. I think Brainchip is a sell. The valuation for me is outrageous. The last quarterly, I think they did $112,000 of cash receipts for a valuation that was $3 billion last time I looked. I mean, they've got some revenue coming their way with a deal that's come across the table for them, a bit over $2 million revenue coming their way, but that doesn't put a dent in the $3 billion market cap in any sense. 

And the other quick interesting anecdote that I'll slip in is I had a look on YouTube at some videos on Brainchip and the ones that are talking about the stock were getting views of between 10,000 to 20,000. And the ones that were talking about the underlying technology and its uses are getting views of around 500. So, I think the stock price has a lot more excitement in it than the underlying technology at this point. So sell.

Ally Selby: It actually finally bagged a new CEO and it recently announced a deal with Mercedes. Over to you, John. Is it a buy, hold or sell?

John Deniz (SELL): No, I'm with Josh here. It's a big sell, indeed. It's been on a tear and well done onto anyone that's made money in it. But as Josh said, at a $3 billion market cap, no revenue, high cash burn, it's defying gravity. 

Frontier Digital Ventures (ASX: FDV)

Ally Selby: Staying with you, John. Next, we have the automotive and property marketplace business Frontier Digital Ventures. Is it a buy, hold or sell?

John Deniz (HOLD): This is a hold for us. You are backing a strong management team who were behind iProperty, which was of course taken out by REA. The guys have demonstrated they can build and scale a classified marketplace in emerging nations. However, headwinds for long-duration assets means the stock is a hold for us.

Ally Selby: Over to you, Josh. Is Frontier Digital Ventures a buy, hold or sell? 

Josh Clark (BUY): I think if you just take a really simplistic view, you can call this one a buy. Obviously, something that's trading on around 10 times future revenues in a tech smash-up is pretty scary to buy. But if you think about it on a more long term basis, the Australian experience and globally for that matter has taught us what online classified businesses can do. Not only can they compound at really high rates of return, but they can do it for extremely long periods of time. 

Frontier has a diversified portfolio of these, and you certainly don't need all of them to pay off, just a small amount of success within that portfolio will be enough for the stock to make money. And I think as John alluded to, the management team - we love having a founder-owner behind the business. So I think this one's a buy.

Audinate (ASX: AD8)

Ally Selby: Last but certainly not least we have Audinate. Its share price rose around 7% in 2021. Josh, I'll stay with you. Is it a buy, hold or sell?

Josh Clark (HOLD): I really like this business. It's a hold for me, though I've admired it from afar for a long time, I've always struggled to get my head around the valuation for this one. I remember a while ago, back when you could travel, going to an audio-visual conference in Las Vegas, where all of the OEMs like Yamaha, Bose, and the like were advertising that they were using Audinate's technology. So it really gave a bit of insight into how much they dominate that niche within audio. And they also have the potential over a longer period of time to do something similar in video. But I think just to earn a reasonable return out of the stock, you need to buy it at a low valuation or you need video to be much more progressed than where it is at the moment. So that one's a hold.

Ally Selby: Last one for you, John. Audinate obviously suffered during COVID lockdowns. But now with re-openings happening around the world, could this be a winner? Is it a buy, hold or sell?

John Deniz (SELL): Ally, it's a sell for us on valuation. We actually owned this from the IPO when the easy money was made and like Josh, we also really like the business. However, the market's already priced in excessive amounts of growth, and we see continued supply chain issues around chip shortages, which we think will impact the business. So it's a sell for us.

Fundies' picks

Ally Selby: We've had a lot of sells in there today, so I might put our fundies on the spot and ask them to select a stock that they think can outperform in 2022. John, I might start on you. Is there a stock that's really exciting for you?

John Deniz: Sure, Lithium Power International (ASX: LPI). It's a bankable feasibility complete or construction-ready lithium developer and we think it'll at least double this year, despite its re-rate. They've got arguably the best-undeveloped lithium brine asset globally. One of the best in South America anyway. And it's a conventional lithium brine asset, unlike some of the others we've talked about in the episode.

What's kept people away in the past is it's had a convoluted ownership structure and that's all about to be cleaned up in our view. And in terms of pricing metrics, they're attractive. It's only trading on a fully-funded NPV of around a quarter. And so we see strong upside and you're getting the lucrative stage for free too. So it's a buy for us and full disclosure, we're long.

Ally Selby: Okay. Over to you, Josh. Your time in the hot seat. Is there a stock that you are backing for the year ahead?

Josh Clark: To keep it small, but not super spicy, one that's maybe a little bit boring, but a longer-term compounder that you can put in the bottom drawer, I might call out Pacific Smiles (ASX: PSQ). So they run dental centres. So many of your readers might have even been there in the past. But what I like about it is the strength of the management team from where they've been in the past, high returns on capital, really long runway for revenue growth. This thing can grow forever and a day. So I think you've got long term returns in something like Pacific Smiles.

Bitcoin versus Aussie housing

Ally Selby: Before we sign off for today, we thought we'd ask John and Josh for their thoughts on two popular, if not controversial, asset classes. 60% of you voted that you think Aussie housing will outperform in 2022, while 40% of you voted for Bitcoin. But let's see what our pros think. Josh, I might start on you. Do you think Aussie housing or Bitcoin will outperform over the year ahead?

Josh Clark: Look, I am going to go with Aussie housing on this one. I've got to make the point that it's a pretty cruel question because I'm sure you know that I've got no idea how to predict the Bitcoin price. But if I was to have a go at it, you'd say at least with Australian housing, you've got some fundamental indicators of value and where price should be. Obviously things like rental yields, affordability, availability of debt, that sort of thing. So that's going to keep house prices within a natural band.

Bitcoin on the other hand doesn't have those elements. So the price could be anything, at least in my view. So I think you just need to ask yourself, "Is it a risk-on or a risk-off environment?" Because the additional volatility in Bitcoin is probably going to make it move further than Australian house prices. And I think over the next year if anything, a bit of heat is going to come out of it. So I'll bet on the bricks and mortar.

Ally Selby: Your time in the hot seat, John. Should readers expect further weakness out of Bitcoin this year? What are you backing for 2022?

John Deniz: As you say, Ally, it's still viewed as controversial, but we believe it'll be Bitcoin. And that's knowing that it's down over 20% this month and starting on the back foot. And that's because we see Bitcoin as digital gold, i.e. a store of wealth, and we're constructive on Gold's outlook. And as for Aussie housing, it's had a massive run, and it's a bit hard to see that repeating near term. So I'm comfortably calling Bitcoin as the winner.

Ally Selby: Well, that's all we have time for today. Thank you to John and Josh for your analysis. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If so, why not give it a like. Remember to subscribe to our YouTube channel, we're adding new content every week. And I hope everyone had a lovely holiday period and kept as safe and well as possible. Here's to an even better 2022.

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