Buy Hold Sell: The 5 most-tipped small caps

Buy Hold Sell

Livewire Markets

Let's not beat around the bush here, your top-tipped small caps for 2021 are off to a roaring start. Together, these Aussie Small Ordinaries darlings have returned more than 52% - not bad for a fintech, a bookmaker, a rare earth's excavator, a biotech and a gift-card provider too. 

We know it's early days, but who are we kidding, your most-tipped picks from previous years have performed consistently well. Your small caps from 2019 gained 43% for the year, while your tips for 2020 lifted a respectable (given the circumstances) 6.8%.

So, for this episode of Buy Hold Sell we've brought in the experts to get their take on your 2021 picks. Will Zip Co, EML Payments, PointsBet, Lynas Rare Earths and Polynovo continue to rain in returns over the year ahead, or will the illustrious list transform into a sea of red? 

Plus, Market Matters' James Gerrish grills Tribeca Investment Partners' Jun Bei Liu on the company she believes has been overvalued by the market. 

Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 27 January 2021.


Edited Transcript

Bella Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Bella Kidman and today we're going to be discussing the small part of the market. They say good things come in small packages, so today we're going to be discussing the most tipped small caps for 2021 picked by the Livewire readers. To help me discuss this, I'm joined by James Gerrish from Market Matters and Jun Bei Liu from Tribeca. 

Polynovo (ASX:PNV)

Bella Kidman: Jun Bei, I'll start with you. Polynovo - they develop and manufacture technology for skin graphs. Buy Hold or sell?

Jun Bei Liu (Sell): It's a sell for me because I'd much rather be in a different business, it’s very similar, it's called Aroa, and it is a very similar business, but trading at a fraction of the multiple. Now, Polynovo is a great market leader, it's innovated the market, it's expanded the market, but more recently it has disappointed the market in terms of the impact from COVID-related shut down in the hospital system and the like, and potentially it will come through. But it is trading on a very, very expensive multiple. And on that basis, I just think you'll get much better return coming out of buying Aroa, which is a very similar business coming out of New Zealand and just reported today, great numbers. Of course at the same time, they're all being impacted by the same COVID impact. So it’s very leveraged to the second half and the earnings coming through quite quickly. It’s innovated its business and actually has a very, very good clinical study to support the efficacy of its product, Aroa itself. So yes, on this basis, I think much rather to be in the up and coming market leader than the incumbent one that's trading on much higher multiple.

Bella Kidman: James, Polynovo was up 107% in 2020. It hasn't really kicked the year off the same way. Buy, hold, or sell?

James Gerrish (Sell): Yes, I've got a sell on it. Really expensive stock that has missed in terms of their outlook. I think that's a really key thing for investors to monitor. If something is priced for perfection and it doesn't deliver it, I think it'll be under a fair amount of pressure going forward. They're super high beta stocks. We don't trade a lot in the biotech space, simply because they're really high beta we’re a high conviction portfolio. So it's really hard to put a really decent market weight into, or a decent portfolio weight I should say, into a stock that's so uncertain and non-predictable in the short term and has such big swings in share price.

Lynas Rare Earths (ASX:LYC)

Bella Kidman: Okay, James, sticking with you. Lynas Rare Earths. Had a stunning performance in 2020, started the year off well, up 25% since January one. Buy, hold or sell?

James Gerrish (Buy): Yes, I reckon it's a buy here. I'd like to be a buyer around the sub $5 would be better from a risk reward perspective, but I think the momentum in this business, the momentum in the stock is really high. I think the outlook for rare earths is really positive over the next 12 to 24 months. And Lynas has got some really exciting prospects over that period. So yes, I'm a buy here.

Bella Kidman: Jun Bei, it was up 73% in 2020. Rare in more ways than one. Buy hold or sell?

Jun Bei Liu (Hold): Look, it's probably more a hold for me, because people always say you stick with what you know. This is one business I always felt has a very high concentration risk of where they got their resource from. Highly political and yes, the end market, the opportunity is enormous, but to me it is quite risky, so it is more of a hold for me.

Pointsbet Holdings (ASX:PBH)

Bella Kidman: Ok Jun Bei, taking the bronze spot on our podium is none other than Pointsbet Holdings and what a cracker of a 2020 they had. Up 1076% since the March lows. It's pretty hard not to get excited about this company. Buy, hold or sell?

Jun Bei Liu (Hold): I know it's very exciting. It's a hold for me. Look I'm excited about this business. I think the end market, they talk to term where you look at the growth company, you look at the end market, right? It's continually growing. So you've got the US - different states that are opening up in terms of online gaming, online betting, and that company's well leveraged into that space. And you've got Canada potentially coming out. You've got just new territory continually coming out. And so it just means a bigger end market for this business now. But the thing is it is pretty expensive and near termed, they're waiting on the decision out of New York. The management is a really great management team, great execution. I think it just a little bit too expensive for me at this point.

Bella Kidman: James, are you betting on this company to take you all the way? Buy hold or sell? 

James Gerrish (Buy): That’s a good one, Bella. I've got a buy on this stock simply because this is a stock that's got such an incredibly big market in front of it and they're approaching that market in a pretty aggressive way. So I understand Jun Bei's query around valuation. I think in the short term the numbers out of the US have been slightly underwhelming. The numbers in Australia have been pretty good. They're going aggressively into a really high competitive market. But I think this is one to buy, close your eyes and see how it goes in the next 12 months. So I don't know about getting caught up on the short-term valuation. It could be overvalued, it could be undervalued depending how they execute and what plays out in the US, so it's a buy for me.

EML Payments (ASX:EML)

Bella Kidman: Taking the silver spot is poor old EML. After a shocker of a year in 2020, Livewire readers have chosen it yet again as their second-place pick. James, Buy hold sell on EML?  

James Gerrish (Hold): I don't know if it's that much of a poor, old EML. Yes, I've got a hold on it. Pretty much since June, it's been stuck between $3 and $4, needs a catalyst to get out of it. They've made some pretty good headway operationally to reduce their reliance on malls and people physically going to shopping centres. So it's an evolving business. I think they're a little bit convoluted in what they do. It's not a simple concept like an Afterpay that has got this simple offering that is easily articulated and that can be rolled out in many markets globally. EML are in a lot of markets around the globe, but I think it's a fairly complicated business and it's a hold for me.

Bella Kidman: Jun Bei, this payments company has been no gift to shareholders over the past twelve months. Buy hold or sell on EML? 

Jun Bei Liu (Buy): I think it's a buy for the short-term trading opportunity into this result. I really do think that this business has been most severely impacted by the COVID-related shutdown across shopping malls, particularly across Europe. So the reason they're kind of stuck in that trading range is because the European COVID outbreak has been terrible and clearly no one's going through the shopping centres, and you're not going to buy any gift cards and the likes. So this business is very leveraged to that. So, take a 12 month view, I can see this stock higher.

Zip Co (ASX:Z1P)

Bella Kidman: Jun Bei, I was doing my homework and I stumbled across an old Buy Hold Sell video from July and to this day, I have never seen anyone be so excited about a company as you were with Zip Co. Are you still that excited? Buy, hold or sell?

Jun Bei Liu (Buy): What did I say? Look I like Zip and the whole buy now, pay later sector because we've been an investor and believer of buy now, pay later, so we got into that sector very early in the year. Well, very early in its infancy. So we know how that whole area works and we're very comfortable in the area. Where Afterpay is trading at, simply means Zip is undervalued and simply means every other one such as Sezzle is undervalued. And as long as that dynamic holds up, I think that sector will do well. Zip is slightly different from Afterpay. So Zip to me is a buy, but it is slightly different from Afterpay, because part of the business is to do with lending because it goes up to $10,000, whereas Afterpay's much more efficient and pure in terms of the turnover. It's more like a marketing company than a lending company. So Zip is a buy, it's cheap, relative to Afterpay. And I think it will do well over the next six months.

Bella Kidman: James, is Zip a buy, hold or a sell for you?

James Gerrish (Buy): Yes, I've got a buy on it. I'm pretty optimistic on what it'll deliver over the next 12 months. It's a company that the stock price has struggled over the last 12 months relative to the gains that we've seen in Afterpay. So it's easy to get frustrated. We've held onto that position through that period. And I think now what we've seen in the last update is acceleration of growth coming through. They've grown transaction volumes every month, since March. They really accelerated in December. The US business is kicking goals. And Jun Bei discussed the valuation relative to Afterpay. But if you think about it, relative to a firm which just listed over in the US, slightly different businesses, they're all slightly different in the way they construct their offering. Zip's now got 3.2 million customers in the US. It's about half as much as the firm, but Zip's trading on a 10th of the valuation over there. So if you're thinking about Zip relative to Comps, it's cheap, it's got momentum in the business. And I think it's a really strong buy here.

Questions Without Notice 

Bella Kidman: We're very excited to announce a new segment on Buy, Hold, Sell for 2021, called Questions Without Notice. James, we've asked you to prepare one question for Jun Bei. Jun Bei's never seen the question, and she's had no time to prepare for it. James, fire away.

James Gerrish: I'm interested to hear Jun Bei's response to these stocks that the market loves that have been up really strongly - everyone seems to have a buy, everyone's bullish on a particular stock that she doesn't agree with, that she calls BS on. Any of those Jun Bei?

Jun Bei Liu: I wouldn't say if I call something a BS. It's just, there's lots of businesses and companies that we feel doesn't justify what you pay for them. One example I would say, is Nearmap. Over the years the company has done very well, but we have struggled with what you pay for that business and what they have generated in terms of track records. The business of course has raised capital many times. There's a lot of believers in that business, hoping the end market will grow from Australia to the US and global. Now, it is such a competitive space we are seeing. Even domestically within Australia there's been a number of other competitors that are taking contracts away and whether they can actually replicate that in the US, it is questionable. This is one example of when we do feel that we probably will have to wait to see more evidence of execution before we do become a believer.

Bella Kidman: Some say the small end of the market is where fortunes are made. So will your small caps disappoint this year or will they Zip to new highs? 

I'm Bella Kidman, thanks for watching another episode of Buy, hold, sell. For more content like this, make sure you subscribe to livewire's YouTube channel.

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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.

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