Chris Stott: Why small caps are firing and 5 'Reporting Season Awards'

August reporting season was a rollercoaster but it didn't stop the momentum that has been pushing the ASX higher in 2025. 

There were shock sell-offs, steady beats, and a very strong showing from small caps. To help make sense of it, Livewire spoke with small cap stock picker Chris Stott from 1851 Capital, and our very own Kerry Sun, who spends his days hunting for insights from announcements, broker notes and market moves to share with readers on Market Index and Livewire.

This episode of The Rules of Investing was a little different. We unpacked the big themes and surprising stats, dug into the drivers of small-cap strength, and finished off by handing out five light-hearted reporting season awards - from the Stephen Bradbury Award (for the company everyone had written off) to the Sir Alex Ferguson Award (for standout management). 

Listen to the episode by clicking on the player or read a summary below.

Normal results, abnormal reactions

The defining feature of this season? Volatility. UBS found the average price move on results day was 7.8%, up from 6% in recent years.

Put simply, a “normal” result was often met with anything but a normal share price reaction.

“We’ve all seen it,” Sun said. “A stock reports, looks fine at the open, and by the afternoon it’s down 10%. It was violent.”

The numbers backed it up. By the end of August, a third of ASX300 industrials had beaten expectations, while 22% missed. On the whole, that’s not wildly different from recent results seasons. Yet the share price reactions were often double-digit moves.

Dividends also stood out. They came in 15% ahead of expectations, with a wave of special dividends and buybacks. In an environment where earnings growth remains patchy, boards seemed eager to return capital.

Stott agreed that the results themselves weren’t out of line with history, but the market’s reactions were.

“It was probably the most volatile reporting season in memory,” he said. “Earnings revisions were modest - single digits in many cases - but share prices were swinging 20–30%.”

Stott says the big moves are a sign of a hot market exacerbated by a changing market structure with thinner liquidity, more passive money, and concentrated share registers. 

The tide is turning for retail (and Victoria?)

Peeling back the surface, a few themes stood out. The first was the positive impact of lower interest rates. Consumer-facing names in particular showed signs of life.

• Harvey Norman (ASX: HVN): like-for-like sales up 8.7% to start FY26.
• Nick Scali (ASX: NCK): sales growth of 7%, continuing a remarkable run.

“These are some of the most interest-rate-sensitive retailers in Australia,” Stott said. “The strength of their updates suggests the consumer has more resilience than many thought.”

Another theme was the recovery, however tentative, in Victoria. After being the worst-performing state for several years, delinquency rates are improving, and REITs with exposure to the state reported better conditions.

Stott admitted it’s a contrarian view, given the headlines about Victoria’s economic woes. But he believes the low point may already have passed.

Mining services also had a standout season. Contractors like McMahon Holdings (ASX: MAH) and SRG Global (ASX: SRG) delivered their best results in years, each seeing their share prices jump more than 20%. With commodity capex ticking up, the outlook for the sector looks brighter than it has in a long time.

Small caps are firing (finally)

After years of lagging, the ASX Small Ords jumped 8.4% in August, taking the year-to-date run to over 17%.

Stott summed up the driver in two words: interest rates.

“Small caps generally outperform when rates are falling, and that’s exactly what we’re seeing. The outlook looks really strong with more cuts likely to come through.”

He pointed out that brokers are now seeing large-cap funds dipping into small caps for the first time in years. That’s often an early signal that the cycle has turned.

Importantly, this isn’t just about a relief rally. The drivers - falling rates, improving consumer activity, stronger capex - are structural shifts that can support earnings growth over the next 12–24 months.

The Small Industrials Index now trades north of 20x earnings, a rich multiple by historical standards. The challenge will be for earnings upgrades to justify the higher valuations.

“If cyclicals like retailers and housing names start upgrading earnings, then you can justify the multiples,” Stott said. “If not, it’s a harder story to sell.”

Stott also opened the playbook on how 1851 Capital is positioned. The fund recently passed $600 million in assets, with top-quartile performance over one, three, and five years.

1851 Capital's key positions:

• Zip (ASX: ZIP): the fund’s largest holding. After falling to $1 in April, the stock has rebounded to more than $4, driven by strong performance in its US business. “It’s absolutely firing on all cylinders,” Stott said.
• Tuas (ASX: TUA): a familiar play for 1851, given its history with founder David Teo. A smart acquisition during August sparked a rerating.
• Propel Funeral Partners (ASX: PFP): a more defensive bet. After a period of underperformance, Chris believes lower death rates and slower acquisitions are turning, creating an opportunity.

 The fund is fully invested with 5% cash, giving it some dry powder for opportunities. 

Stott says the underlying tone is more positive than it has been in years. Interest rates are falling, consumer spending is showing resilience, and small caps are back in the conversation.

“It’s probably the most buoyant we’ve seen the small-cap market since coming out of COVID.”

For investors who’ve been waiting on the sidelines, this may be the early stages of a new cycle.

The reporting season awards

For a bit of fun, we have come up with five post-reporting awards and asked each of our guests for their nomination.

The Sam Konstas Award

• Chris: Zip (ASX: ZIP) - a $5bn turnaround story, likely ASX100 bound.
• Kerry: RPM Global (ASX: RUL) - strong run, but set to be taken out by Caterpillar.

The Daly Cherry-Evans Award

• Chris: Domino’s Pizza (ASX: DMP) - squeezed by competition and coupon culture.
• Kerry: CSL (ASX: CSL) - return metrics halved since the $12bn Vifor deal.

The Stephen Bradbury Award

• Chris: Kelsian (ASX: KLS) - long-dated bus contracts finally delivering.
• Kerry: NextDC (ASX: NXT) - patchy result, strong order book turned sentiment.

The Sir Alex Ferguson Award

• Chris: Eagers Automotive (ASX: APE) - navigating cycles, shares at record highs.
• Kerry: Megaport (ASX: MP1) — CEO Michael Reed inspired confidence mid-call.

The Sir Donald Bradman Award 

• Chris: SRG Global (ASX: SRG) - steady 10–20% earnings growth for years.
• Kerry: Nick Scali (ASX: NCK) - up after every result since 2023.