GENUINE ASX MICRO-CAPS
When I say that Under the Radar Report introduces investors to stocks that they might not have heard of, this is certainly the case today.
We pride ourselves on our big network of small-cap investors and Steven McCarthy and his team at DMX Asset Management invest almost exclusively in the microcap end of the market. I’m talking about companies with market caps of between $25m and $100m.
This is why Steven is a regular in our round tables and this month we have a special treat, where he goes into more depth around his portfolio of over 40 stocks.
Because you’re Under the Radar Report members, you will have heard of some of these stocks. Take a look at DMX’s top holdings, which include UTRR favourites:
- MedAdvisor (MDR)
- Embark Early Education (EVO)
- Count (CUP)
- LaserBond (LBL)
- Energy One (EOL)
That’s because the strategy of investing in stocks that are ignored is very much Under the Radar’s sweet spot: as the company grows, investor interest does too and the ability for investors to trade in and out improves. A key is not only finding good stocks but then holding on.
But make no mistake, there will be many that you haven’t heard of and I encourage you to listen to Steven’s interview with me, which elucidates even more detail than my interview summary below.
I’m sure you will enjoy Steven’s comments because like you, he is a valuable member of Under the Radar’s community, which means that we can all profit from one another’s collective experience.
Get growth and value at the small end
At a time when economic growth is flatlining, Steven McCarthy’s team at DMX Asset Management has done a review of the top 10 positions and found an average revenue growth of 15%, which underlines why you need to be owning quality Small Caps now, more than ever.
Some holdings are delivering 25% revenue growth. There’s certainly the opportunity invest in these really small names that do have coming off a low base, and then a lot of market opportunity to expand their market and in their revenue.
His fund can do this because it currently has under $30m under management, which gives it the flexibility to invest in these companies, but only does so if they measure up to the group’s criteria:
We have a strict value approach to protecting our clients’ money. We’re buying businesses at less than market multiples, or below asset backing.
We’re looking for companies that grow earnings at 15% a year, not for ones that the market thinks will hit the ball out of the park.
DMX only invests in Small Caps that have a track record of making profits, often ignored by the wider investment community:
We want to be giving our investors exposure to interesting companies that are really under the radar and hard to get access to, but that are interesting, Australian success stories. Because of their size, and lack of liquidity, they often don’t attract a broad investor interest.
That’s the opportunity where market pricing is very inefficient. The pricing is more inefficient the lower down in valuation you go.
Under the Radar’s sweet spot
Many stocks the company invests in are the very same stocks that we favour at Under the Radar Report. Take a look at DMX’s top holdings, which include UTRR favourites, MedAdvisor (MDR), Embark Early Education (EVO), Count (CUP), LaserBond (LBL)andEnergy One (EOL).
That’s because the strategy of investing in stocks that are ignored is very much Under the Radar’s sweet spot: as the company grows, investor interest does too and the ability for investors to trade in and out improves. A key is not only finding good stocks but then holding on.
When selling isn’t a choice
Often holding on isn’t possible in the Small Cap space because takeovers are not uncommon. Indeed, this trend has only increased as interest rates start coming off and growth is difficult to come by. Interestingly, DMX has a similar track record of stocks getting taken over to Under the Radar Report, which is about 20% or one in five of our recommendations:
We want to hold these stocks for the for the journey… but we have seen a number of takeovers across the portfolio.
Typically, we’ll see of those 40 stocks that we own maybe each year five or six would be taken over and that’s very helpful in terms of providing some liquidity for us to then recycle those proceeds into the other opportunities that we’ve seen.
Financial services can deliver big profit growth
DMX is a stock picker, but we notice that financial services have quite a big weighting, owing to the leverage involved, which works at the small end of town.
The fund owns financial planning group Count Limited (CUP) which is one of Under the Radar Report’s favourites. They also hold Sequoia Financial (SEQ), Prime Financial (PFG), Fiducian (FID) and the India-based Findi (FND).
We’re seeing the advisor market starting to strengthen; I bought some Count the other day. There are genuine cross-sell opportunities with the accounting network versus the financial advice network.
The accounting business model is pretty robust in terms of the recurring nature of revenues.
Go India!
His team has come back from a tour of Findi’s businesses in India, which has been one of the better performers on the ASX, big or small cap. The plan is for the company to list on the Bombay Stock Exchange as well, but Steven was most impressed with the business excitement in that part of the world:
There’s a lot of interest in Investing in India and the economy is going gangbusters. There are a lot of people and there is a good work ethic.
More stocks that are Under the Radar
The engineering consultant Verbrec (VBC) comes to mind when we move onto holdings outside of financial services, being involved in energy transition projects:
We like this business because it’s supported by strong tailwinds that support revenue growth. The company does the engineering and design, then once the project is up and running, they also do the asset maintenance services, which are recurring revenues…[Verbrec] is well exposed to renewables and energy transition.
Verbrec’s stock has bounced in the year to date from 6 cents to 14 cents and generates well over $100m in revenues, yet its market cap remains at just over $40m and is generating strong earnings growth at the bottom line.
Listen to Steve being interviewed and you’ll hear about more such stories, including RPM Automotive (RPM), Pure Profile (PPL) and Aeerus (AER) to name just three because these Under the Radar stocks really are where the excitement is. You need to be patient to take advantage, but the returns can be well worth the risk.
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