In today’s Fat Tail Daily, With property investors and big money moving in on discounted REITs, it’s time to take the same contrarian approach to beaten-down small caps — find out how to tap into Western Australia’s boom via an overlooked retailer with expansion plans. Plus, discover why surging migration and construction costs point to an inevitable house price boom, and how being early to ‘green bananas’ can pay off down the road.
Today’s Fat Tail Daily begins with a hat tip to the team at Bell Potter for creativity.
They’re current likening ASX Real Estate Investment Trusts to green bananas: ‘some people like them, but they’re not quite ready yet.’
Ha! Love it.
As it happens, I was at an investor presentation last week with big time commercial property investor Warren Ebert.
Here’s a snapshot of the man — a snappy dresser as you can see…
Source: Callum Newman
Warren, via his firm, is buying two office buildings in Melbourne for about $90 million.
Clearly, he’s not waiting for the market to ‘ripen’!
It should be said that Warren invests via an unlisted trust.
That means his assets and company don’t trade on the stock exchange.
Take it for granted…
If a big player like him is moving in on the discounts on offer, we can be sure other big money could flow to the property shares on the ASX pretty soon too.
Let’s think along the same lines…
I keep making the same case for the small-cap sector as well.
Both the REITS and the small caps have been carted like a Glenn Maxwell pull shot in the last two years.
This has happened for the same reason: rising interest rates!
You and I both know we copped another one yesterday.
The market rose in the week preceding the announcement.
Clearly it had priced this rise in because there was no great sell off after the news came out — in stark contrast to earlier in the year.
It seems as of now, the market thinks this may be the end for rate rises.
This is important.
Part of what has rattled the market is the uncertainty around how high rates could go.
The more certain we can be that the rises are over, the more investors will feel comfortable allocating to risk assets.
Right now, you have a chance to accumulate small-cap shares while they are trading at depressed prices.
But where to start?
Here’s one idea for you.
I mention that Warren Ebert presentation for another reason. I happened to chat to one of his investor relation team.
This gent — a lovely chap, by the way — is tasked with raising money from investors to close the deals.
He told me, ‘There’s a lot of money in Perth right now’.
This stands to reason.
We’ve had big commodity profits in recent years, with iron ore riding high (still), the lithium bonanza and, recently, even oil and gas pumping out profits.
Much of these big profits, capital spending and high wages occur in Western Australia.
I don’t know of a REIT that has exclusive assets in WA.
How else can we take advantage of a boom going on there?
My idea is hidden. It’s not an obvious way.
It’s via retailer Beacon Lighting [ASX:BLX], which I’ve previously recommended in my Small-Cap service, Australian Small-Cap Investigator.
Beacon, like most retail stocks, has been clobbered in the last few years. There’s a lot of bad news battered into the stock at this level.
But it’s an established, profitable business. The team behind it have been doing it for a long time.
You could make a case to pick it up just for its existing operation now.
Yes, retail and consumer sentiment are hurt by rising rates. But not everyone is.
For most people over 50, rising rates are a boon. They get more return from their savings! They don’t have mortgages.
Beacon has every chance of catering to and monetising this demographic.
Then we get the cherry on top.
Beacon’s management have made it known they intend to expand their retail footprint into WA.
They are currently heavily biased to the east coast.
This is not the type of expansion they can do in six months.
You need to be prepared to look out 2–3 years and give management time to rollout their WA stores.
You also need to back management to deliver.
Think about your future self here.
In 2025 or 2026 it’s possible you’ll be reading Beacon’s results and hearing about how well their WA stores are trading.
The current interest rate squeeze will likely be forgotten. Who knows where consumer confidence and spending will be by then? No one.
We do know that house prices are rising again, and even the RBA acknowledges that the wealth effect of property pushes up consumption.
Again, the proven team at Beacon has every chance of taking advantage of this.
Here’s another thing I got from that Warren Ebert presentation.
He suggested the recent immigration into Australia might even be bigger than most mainstream reports, based off stats from the Immigration Department.
I can’t be sure, but I do know migration is surging in Australia at the same construction costs are surging and putting the profit out of building houses.
A house price boom looks as inevitable as anything in financial markets can be.
And there’s Beacon trading at a modest P/E and with low liquidity.
Small-cap investing carries high risk and you should always conduct your own research before investing.
You might be early buying today. But in three years?
Well — there’s no better taste than a ripe banana.
Editor, Fat Tail Daily