I believe the run in the small caps has been driven by investors looking down the size curve to generate better investment outcomes.  Simply, the big caps have just not been performing. 

The big banks have been going sideways for the past 4 years; yield stalwart Telstra has cut its dividend and is trading back to where it was in 2009; and the resources sector, as a whole, has not made any gains in over 10 years. These companies alone comprise around 50% of the All Ordinaries so I think the investment community is starting to seriously look outside the top-end of town for the next leg of capital growth.

Don’t buy the hype

Clearly technology is dramatically changing the way we live. From transportation, logistics, media, communication, security, finance, and retail, almost every sector has been impacted by technology.  However, the hype surrounding this sector is reminiscent of the tech bubble of the late 90’s.  There are countless ASX listed companies with market capitalisations in excess of $100m that are not even close to producing $1m in revenue, let alone a profit.  Even though early investors have done well to date from these companies, I would think very carefully before allocating ‘hot’ capital into these stocks.  The current expectations implied by these valuations just appear too optimistic.

An early-stage roll-up in a defensive industry

Our high-conviction idea is the accounting consolidator, Kelly and Partners (KPG).  With just 14 NSW based accounting practices under its banner, there is no doubt this company is in the early stages of its growth profile. Further, the macro tail-winds are clear: the Australian Tax Act continues to become more complicated; taxpayers will always want to find new ways to minimise their tax; and the government will always be looking to increase its tax receipts.  This industry is not going away.  And KPG, being a well-funded, profitable, dividend paying, early stage consolidator is likely to fare very well over the next few years as it expands its network and grows its margins.


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