Only one of your small caps was in the black in 2022... And then the CEO sold his shares

David Thornton

Livewire Markets

2009 called and wants its volatility back.

Yes, investing this year has required a strong will and an iron stomach. No sector was immune from the volatility, and it seemed that things only got worse the smaller you went down the market cap spectrum. 

While the S&P/ASX 50 is in positive territory (just) with a return of 0.18% year to date, the S&P/ASX Small Ordinaries has returned -16.53% over the same timeframe. 

Our reader picks suffered twice the damage of the market writ large, losing 32.73%. Of course, this loss is only realised if you sell! It also doesn't help during a rate hike cycle if your basket includes a lot of long-duration tech stocks. It's even worse if you're in the BNPL space, invested in names like EML Payments (ASX: EML). Pure carnage. 

And on that note, here is how the small cap reader survey picks performed in 2022. 

Note: By publishing this list, we are sharing information from the Livewire readership that hopefully inspires further research ideas. This information is not, nor is it intended to be, a set of recommendations. Please do your own research and seek professional advice.

How they're tracking:

  • The average market cap of these 10 companies is $776 million, down from $1.13 billion when we last touched base in January. 
  • While the cumulative losses relative to the benchmark were greater this year, more stocks (3) outperformed the benchmark compared to last year (2). 
  • Brainchip was the best-performing stock (+8.09%) and the only one of the bunch to finish in the black, while EML Payments brought up the rear with -79.41%. However, the CEO sold all his shares this week after the data for this article was crunched, which put the company at -13.92% YTD. 
  • Putting all this together, it's actually Lake Resources which takes the crown as the best-performing stock. 

BRAINCHIP HOLDINGS (ASX: BRN)

  • Share of tips: 0.61%
  • Total return: 8.09%*

Someone forgot to tell Brainchip about inflation, market volatility, hard and soft landings into recession, and all the rest of it. It's the sole positive gainer of the bunch at 8% for the year.

But hold the phone! This week, after the data for this article was crunched, Brainchip's CEO Sean Hehir offloaded shares - $700,000 worth.

These small caps don't have large market caps, hence the name 'small' caps, so a sale like this, by the CEO no less, moves the market.

Alas, the company is now down 13.92% year to date, and 68% down from its peak in mid-January. 

Editor's note: An earlier version of this article said the CEO of Brainchip Holdings sold all his shares. This is not correct. A company representative has said that the shares were sold to cover a tax obligation relating to RSUs granted under the company's Long Term Incentive Plan. 

LAKE RESOURCES (ASX: LKE)

  • Share of tips: 0.99%
  • Total return: -0.50%

If there's one thing that gets under the bonnet of listed companies, it's short sellers.

J Capital Research is leading the charge here. I won't labour over their report, but essentially their skepticism centres around a direct lithium extraction (DLE) method that's meant to extract lithium from brine, the success of which will make or break its Kachi brine project in Argentina.

"Investors still have no evidence that the Lilac DLE technology works at scale and if so at what cost." The report also zeroes in on the lack of investment the developer generated for the project.

As with all reports from short sellers, it needs to be taken with a grain of salt.

Despite all that, LKE's return has only just dropped into the red at 0.50% year to date, thanks in large part to the surging lithium price. And that's after the price fell from $2.45 in April to just under $1 today.  

AUDINATE (ASX: AD8)

  • Share of tips: 0.49%
  • Total return: -7.68%

Audinate is in the business of audio-visual networking - essentially, how devices communicate with one another. It's done relatively well this year, if well and negative can be put in the same sentence. It's down just 7% year to date.

"They're just getting their platform in as many devices as possible... I'm absolutely convinced they'll be the dominant platform in their space in the future," said Donny Buchanan, Co-Founder, CIO and Portfolio Manager for the Lakehouse Small Companies Fund, on The Rules of Investing in August.

"Despite being a tough operating environment over the last couple of years, I think the management team have done an incredible job of doubling down and investing for the long-term."

CALIX (ASX: CXL)

  • Share of tips: 0.86%
  • Total return: -23.46%

Calix recently announced a JV it's entered into with Pilbara Minerals for a "mid-stream" Demonstration Plant at the Pilgangoora Project, which has "the aim of producing lithium salts via an innovative midstream “value added” refining process utilising Calix’s patented calcination technology, as well as for the potential commercialisation of the process."

Pilbara Minerals will take a 55% stake, with Calix taking the rest.

Pilbaba Minerals CEO Dale Henderson said of the deal: "The Mid-stream project has the potential to be a game changer for our industry. If successful, we will be able to deliver a superior chemical intermediary product to market compared to spodumene concentrate."

VULCAN ENERGY RESOURCES (ASX: VUL)

  • Share of tips: 0.86%
  • Total return: -29.28%

VUL's stock has recovered this past month as investors buy into the progress of its zero-carbon lithium and geothermal energy development project in the Mannheim district, Germany.

The lithium it's produced so far is the highest grade, lowest impurity lithium hydroxide the market's seen to date.

“As we go into winter, the Vulcan team is working hard towards developing renewable heating production on a mass scale for Central Europe, combined with sustainable, domestic lithium production for the auto industry, from our Zero Carbon Lithium Project in the Upper Rhine Valley, the largest lithium resource in Europe," says Vulcan’s Managing Director and CEO. 

LIFE 360 (ASX: 360)

  • Share of tips: 1.11%
  • Total return: -35.43%

Life 360 shares copped a beating this year as investors rotate out of tech stocks.

But the market may have overplayed its hand.

Brokers are bullish on the tech stock, with Chris Savage over at Bell Potter maintaining a Buy rating off the back of a $50m capital raising last month. However, he doesn't believe this fresh cash will be put to work, "but rather to simply provide a buffer so that cash at bank does not drop below US$50m before the company starts generating positive free cash flow in Q3 or Q4 of next year."

Bell Potter still predicts the company will hit its 2022 revenue guidance of between US$225-240 million.

AUSSIE BROADBAND (ASX: ABB)

  • Share of tips: 0.64%
  • Total return: -41.05%

Not a pretty year for ABB; it's lost almost half its value.

Morgan Stanley initiate coverage of the stock a month ago with an Underweight rating.

They give a nod to ABB's excellent execution during the "once in a lifetime broadband churn event" during the NBN rollout, where it grew market share from <1% to 6.4%, but note the limited scope for growth amid increased competition.

"The competitive landscape is changing. As organic growth rates slow, the possibility of industry M&A rises, as the scale is important to the sustainability of returns. In such an environment, ABB, in our view, could plausibly become a consolidator."

FRONTIER DIGITAL VENTURES (ASX: FDV)

  • Share of tips: 0.61%
  • Total return: -52.24%

Frontier Digital Ventures Limited is a private equity firm that invests in and develops online classifieds businesses in emerging markets.

The open question plaguing the minds of investors is when, and if, the company becomes profitable. The company posted a loss of $15m for the financial year.

In this Buy Hold or Sell, back in September, our fundies were split on whether the company was worth investors' capital.

1851 Capital's Chris Stott gave it a Buy.

"Run by Shaun Di Gregorio, proven operator at REA and iProperty Group, previously. The sum of the parts is way north of the current share price, underappreciated by the market."

Yarra Capital Management's Joel Fleming was less convinced, however, gave it a sell.

"Very high regard for management, really believe in the structural theme, emerging markets. There's just too much risk in the current environment."

POSEIDON NICKEL (ASX: POS)

  • Share of tips: 1.31%
  • Total return: -66.36%

The POS share price has been in a steady, albeit steep, decline all year. But the company has by no means waved the white flag. 

Nickel is the primary element used in lithium-ion batteries (yes, more than lithium) so its demand dovetails demand for EVs and the batteries that run them. 

Poseidon Nickel is in the middle of all this, and they're not sitting on their hands. Just the opposite - they're in full-throttle fundraising mode, hoping to raise $9 million worth of equity that will enable them to put their Black Swan project into high gear. 

“This placement and SPP will support the Company’s strategy to grow our nickel inventory and to “Fill the Mill” at Black Swan as we move to a decision to proceed in Q2 2023 with first production to follow in 2024," CEO Peter Harold said this month.  

"The funds raised will be used to convert more Resources to Reserves at Black Swan to expand the mine life, continue with pre-production works, order long lead items, complete the rougher concentrate Feasibility Study and undertake an extensive drilling program at Lake Johnston targeting Emily Ann style (+3% Ni) mineralisation."

EML PAYMENTS (ASX: EML)

  • Share of tips: 0.64%
  • Total return: -79.41%

It's been an absolute bloodbath for Buy Now Pay Later providers, not long ago the hottest stocks on the ASX. 

EML gained 60% in the last three months to 19 October but quickly unwound that progress to be down almost 80%. It's not alone, competitor Zip has lost over 80% for the year. 

It looks like the sharks are circling the company. The Australian Financial Review that activist Alta Fox took a 6.3% stake in the company, and took part in voting against the reappointment of Peter Martin as chairman of the board. 

Nonetheless, the stock did jump about 40% late last month after the company outlined a new strategy that will focus on government and retail markets, embedded payments solutions, and human capital management. 

"There is a significant and exciting opportunity to evolve our business over time; from being largely in prepaid cards, to an embedded finance leader within the next five years," said chair Peter Martin. 

Livewire's 2023 Outlook Series is coming...

Okay, we get it. The stock picks for 2022 didn't perform as planned. And with many market participants proclaiming a new market era has begun, there's no time like the new year to dust off those crystal balls and take a look at how fund managers are tackling whatever may lay ahead.

This year, we've wrangled 16 of the best fund managers across Sydney and Melbourne to hear their worst calls from 2022, outlooks on 2023, and some bold calls that are sure to cause a stir.

And of course, they will also nominate their top stock picks for the year ahead. But is the defensive play a safer route? Or will the market take flight? You'll just have to patiently wait until January 2023 to find out. 

Heavy Hitters, Big Calls, Bold Predictions, Top Stocks the 2023 outlook series
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David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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