Chris Stott: The small-cap buying opportunity is still ahead

Back in May, Chris Stott told Livewire he expected a major buying opportunity in small caps before Christmas. With the year drawing to a close and share prices under pressure, he still thinks that opportunity lies ahead.

The Chief Investment Officer of 1851 Capital says small industrials have fallen more than 20% from their October 2025 highs. 

But he believes the market may still be underestimating the pressure that higher interest rates, inflation and falling house prices could put on consumers over the next three to six months.

“I think it’s still to come. I think we’re getting close though,” he says.

For Stott, the challenge is recognising when share prices have begun to look beyond those difficult conditions. He wants greater clarity on the interest-rate outlook and is watching the Australian three-year government bond yield for signs that expectations are shifting towards rate cuts.

Another signal is more readily visible to anyone following company announcements: businesses issuing earnings downgrades and seeing their share prices rise.

He recalls the months after the March 2020 market low, when companies continued to announce deteriorating earnings even as their shares recovered. That response can indicate that investors have already anticipated the bad news.

“That is almost one of the most bullish signals you can see as an investor.”

While Stott waits for those conditions, he has already sold out of the AI infrastructure beneficiaries that helped drive 1851’s returns over the past two years.

His concern is valuation. Electrical contractors such as SKS Technologies (ASX: SKS) and Southern Cross Electrical Engineering (ASX: SXE) had attracted earnings multiples above 30 times. Stott says contractors have typically traded on around 10–15 times earnings during his career, reflecting tight margins and the risk that one problematic contract can undo the profits from many others.

“The easy money has been made,” he says.

He remains positive about the businesses and would consider buying back at more attractive valuations. But strong demand for AI infrastructure does not, in his view, justify paying any price for the companies supplying it.

Elsewhere, he is finding opportunities in companies whose growth depends on their own operational improvements or industry conditions.

Bapcor (ASX: BAP) is now the fund’s largest holding. Stott argues that much of its recent trouble has come from internal problems, and points to improving customer service, inventory reductions and cash released from working capital as evidence that the turnaround is progressing.

He sees further potential in the retail business and margin recovery, while identifying renewed debt growth or the loss of key customers as warning signs that would challenge his thesis.

COG Financial Services (ASX: COG), another top-five holding, offers a different source of growth. Stott says its novated leasing exposure is benefiting from electric vehicle incentives and greater regulatory clarity, while its shares still trade on a low double-digit earnings multiple.

Investor positioning also matters. Stott describes attending a Generation Development Group (ASX: GDG) investor day and finding the room full of competing fund managers. With so many potential buyers already invested, he saw fewer sources of additional demand. He says 1851 has since bought back below $3 as the valuation and ownership picture changed.

In the interview below, Stott explains how he balances these opportunities with his cautious economic outlook. He also discusses the shrinking pool of listed companies, two recent IPOs he likes, and what selling Afterpay too early taught him about holding winners. Stay to the end for the company he would own if the market closed for five years.

Chapters:

• 00:00 – Launching 1851 and managing the fund’s size
• 07:28 – Why Stott has sold his AI infrastructure winners
• 12:18 – Is the small-cap buying opportunity still ahead?
• 17:25 – The signals that could mark a turning point
• 20:42 – Finding growth and the case for COG Financial
• 24:35 – Bapcor and the turnaround thesis
• 31:24 – The shrinking pool of listed companies
• 35:36 – Tracking crowding and revisiting GDG
• 40:29 – Two recent IPOs Stott likes
• 42:35 – The lesson from selling Afterpay
• 44:06 – What investors may be underestimating
• 45:51 – A stock to own for five years