Forget Pro Medicus: This software stock is emerging as a future fundie favourite

A buying frenzy among some of Australia's top small-cap stock pickers has pushed a software business 218% higher over the past 12 months, as professional investors jockey to get ahead of the crowds that can push tech businesses to nose-bleed valuations. 

The business is under-the-radar energy trading software group Energy One (ASX: EOL). It operates across Australia, the UK and Europe, with its organic sales and profit growth catching the attention of investors. 

In April, small-cap gurus Wilson Asset Management revealed it had taken 6.14% of the business, although others, including Ben Richards, investment analyst at the Seneca Australian Small Companies Fund, and Claude Walker, founder of A Rich Life, beat their larger rivals to the story.

"Energy One has quietly been one of the top performing stocks on the ASX over the last 12 months. And it’s not a household name. But we think it should be," said Ben Richards.

"The company holds a dominant 50% market share in Australia and a growing 15-20% share in Europe, making it a critical player in a sector poised for long-term growth."

Seneca's Small Companies Fund has thumped the market to return 28.3% after fees for the 12 months to April 30 and Richards says its success is partly down to avoiding hot stocks or crowd favourites such as Pro Medicus (ASX: PME) and Zip Co (ASX: ZIP).

Richards says unlike these hot stocks that offer plenty of room for downside, Energy One had a relatively cheap valuation and low expectations over the past 12 months. In February, it reported 18% annualised recurring revenue (ARR) growth and 126% EBITDA growth to $7.4 million. 

"So, you get the wonderful double-edged sword of earnings growth and multiple expansion," says Richards. "Inflecting profitability has been a powerful theme for us to generate alpha. We continue to see upside for shares, with a path to generate ongoing outsized earnings growth and trade up to $15 to $20 per share in the medium term."

A Rich Life

Energy One shares changed hands for $13.39 on Wednesday, and others, such as ultra-early Pro Medicus apostle Walker, also say it ticks the boxes as a potential winner. Walker says this is partly because it has potential to eventually be added to larger indices and catch a tailwind from index-tracking passive investment money. 

"When I made its official recommendation at $5.08, it was cheap based on valuation...now I don't think it's cheap based on valuation, but I do think the sociological set up is good as in the last year or so, lots of small cap funds have taken an interest in it."

Another small-cap stock picker believed to invest is DMX Asset Management, while another manager in the space is also believed to have a decent stake in it but has been provided anonymity on the issue.

"If I didn't own any already, I think it's a 'buy the dip' situation, so I'd still look to accumulate," says Walker, who tipped $11 per share as a reasonable entry point for interested investors. 

"It's got honest, competent management, and if you look at hype stories like Weebit Nano (ASX: WBT), Brainchip (ASX: BRN) and Cettire (ASX: CTT) that got added to the S&P/ASX 300, I don't see why Energy One can't, in time." 

As such, Energy One could be worth a look, but don't forget the small-cap end of the market can bring significant risk of capital losses as well, and is only really suited for experienced investors.