Small-Cap Spikes and Forecasts

By far the most interesting move in the small-cap sector lately came yesterday.

It was small business bank Judo Capital [ASX:JDO] ripping up 16% on the day.

For a moment, I thought to day trade it.

Let me explain what happened…and why you should care!

We can glean all sorts of insights about the economy and the stock market from this price action.

Small caps are where the action will be in 2024

Let me set the scene first…

The blue-chip stocks on the ASX have outperformed the small-cap sector for two years.

It takes one second to write that sentence…but I’ve had to live those two years. It’s been a tough grind at times.

You can see it visually here…

There is an upside to this difficult period…

It sets the stage for the small-cap sector potentially to outperform the blue chips for an extended period too.

I make the case that it begins from now…and could run for 2–3 years.

You see…

Like most investors, you probably take comfort having your money in shares like the Big Four banks.

They’re sturdy, pay a decent yield…and you’re unlikely to get hammered on them.

Here’s the problem…

The team at the Auscap investment fund show us that bank earnings have gone sideways for 10 years.

Check it out…

The result? The big bank shares have pretty much gone sideways too.

The market will only bid them up so high when earnings aren’t growing strongly.

Yes…you can sit in these…and while away your time.

But don’t whinge if you’re super fund doesn’t grow much, either.

And any fund managers looking for ‘alpha’ know they must go lower down the market.

That’s where they can find shares that can appreciate higher and faster than these lumbering behemoths.

That path leads to small caps…like Judo!

Down 30%…but it’s not so bad, is it?

Judo Bank, like most small caps, had a torrid 2023. It was down 30%.

However, look further back and it’s even worse.

Judo listed on the market in 2021. It popped to $2.48 per share in the first few trading days on the market.

It’s been grinding down ever since…and hit 93 cents on Monday…which is 63% down from the high.

This is not a criticism of Judo. It’s indicative of the wider market.

Investors got spooked about a recession…bad debts…higher funding costs…and slowing loan growth.

I found myself going over Judo last week.

There certainly appeared to be value there.

Judo is profitable and servicing a niche in the market with good demand. Management are invested in the stock, too.

It seemed to me that the market was overly negative on the whole shebang.

What I couldn’t find, though, was an immediate catalyst to turn around the downtrend.

You see…

It’s possible to find a ‘good value’ stock like Judo, buy it, and then watch it do nothing for ages.

Momentum and volume are important in the market — and Judo had neither.

None of us have unlimited capital, either.

In other words, I passed on the idea of buying stock…for the moment, anyway.

Then came their trading update…

Up 16% in a flash!

I make it a habit to check the company announcements each day.

These usually start hitting the ASX website from 8:30am and run all the way into the evening.

Yesterday, Judo released theirs before the market opened.

I checked it out…

I knew instantly that that release was positive and the market reaction would be positive.

Judo had also unexpectedly fallen about 5% on Monday.

I didn’t know it at the time, but an investment bank had downgraded the stock to a SELL.

Tuesday’s release told me Judo would rise back up on this fresh news. But by how much?

And would the market give me a chance to buy it before the good result became apparent?

I had my answer, once the market opened, in one second.

The stock closed on Monday at 93 cents. It opened on Tuesday at $1 and a second later it was over $1.04.

It was up 10% in a flash. At that point, I wasn’t sure how high it would go…and decided against chasing it.

But that doesn’t mean there isn’t longer term opportunity here…

Judo: a profitable niche to exploit

What did Judo tell the market?

Go back to our background context.

Investor fears are hammered into the share price…an investment bank said ‘sell’ the stock…and the outlook ahead is hazy.

Judo came and said their profit was up…lending was strong…and their margins were solid.

And, compelling for the whole sector, their bad loans are within the expected range.

In other words…what recession? What slowdown? Why all the angst and worry?

Judo is not like the big banks. It focuses on business lending.

This is riskier, but less competitive, because most lenders chase the mortgage market.

Judo is also bringing back ‘old style’ banking…where borrowers can reach out to, you know, an actual person.

This is a differentiated proposition to the big banks and their fake PR BS they put on TV.

Judo is an interesting idea. There could be considerable upside here over time.

Hopefully you can see the broader point. Judo, like small caps, has been hammered down for two years.

Now the market only needs to see things be ‘less bad’ than feared for the stock to start pushing higher.

If Judo can keep delivering, the share price should respond. And it can certainly grow at a faster clip than Big Four banks.

Stay tuned for more from me on this point. The time to start backing these types of ideas is now.

Best,

Callum Newman,
Editor, Small-Cap Systems
and Australian Small-Cap Investigator