Our compliance officer was looking at me like I was mad.
‘Your wife is going to let you do that?’ he asked.
‘Of course,’ I said. ‘She trusts me.’
What had him in such a hot and bothered state?
I was telling anyone who cared to listen – not many, really – that I was borrowing against my house to buy shares. This was last year.
Our compliance officer couldn’t believe it. His eyes screamed, ‘What about the risk?’
He was right, of course. Using leverage in the share market can be very, very risky indeed. It’s not something to undertake lightly.
But I had the courage of my convictions.
And look at the Aussie market now. The ASX is breaking all time new highs.
What can I say except…
…you beauty!
I can tell you, VERY few people saw this coming.
The good news is that I still see so much alpha potential ahead.
Let me explain why…
While the ASX/200 is at all-time highs…
…the small cap sector is not.
It’s the big stocks, especially the big banks, that are rocking up like firecrackers on New Years’ Eve.
In fact, the small cap sector, as a whole, is still well down from its previous 2021 peak.
See that here…
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| Source: Market Index |
This tells me that the Aussie market still hasn’t shaken all the issues that have plagued investors over the last few years.
You know the ones, like…
…inflation…
…high rates…
…the cost of living…
All these are issues the market must still digest.
Even so, that doesn’t mean there hasn’t been some ripping opportunities in the small cap space lately.
Here are four examples of small cap shares ripping up in the last 12 months:
TUAS: +145%
NUIX: +330%
DRONESHIELD: +490%
SPARTAN RESOURCES: +399%
That’s just a few tasters. There’s been plenty of other small caps rip up over this time too.
But, as you can see, the entire small-cap index still has some lifting to do for the small cap sector to break into fresh highs.
And while not every small cap will perform like these…
I see no reason why opportunities like the above won’t keep presenting.
Why?
Fund managers will start to chase the value and higher growth in the small cap sector.
The key trigger for this to happen will be the RBA positing to an ‘easing’ cycle from their current monetary policy.
Lower rates will signal to investors that they can go ‘risk on’. There is also higher earnings growth available in the small cap sector now.
Generally speaking, the perception right now is that rate cuts are unlikely in Australia until next year.
It may be tempting to hold off until there’s an all clear on this.
That would be unwise, in my book.
Earnings are ultimately what drive share prices higher.
The team at Ausbil tell us that ASX earnings growth will likely be a modest 4% this financial year for the ASX 300.
That’s not very exciting.
However, the outlook for earnings is much stronger in the small cap sector.
Ausbil cites consensus estimates for the small ordinaries index of earnings growth of 19%.
Point being…
You should consider trading or investing in this dynamic.
I know I will be.
There are two fund managers literally telling us they are hunting here already.
Ben Griffiths and Jun Bei Lui are two experts I always tune into when I see them speak or appear in print.
They popped up at a recent fundraiser.
Here’s a notable observation from Ben on the opportunity in small caps:
‘There’ve been about 35 to 40 takeover bids last time I checked for Australian small caps since October.
‘So both international and local suitors are actually out looking and buying and bidding for these assets.
‘So I see that and I say, well, that’s confirmation that corporate see value and I know portfolio managers like ourselves see value, and furthermore, I like the way in which good slices of equity have been raised since October.’
I concur.
Point being: just because you hear about Aussie stocks trading at record highs DOES NOT mean there is no further opportunity.
The big stocks may be a little stretched, right now. Or we may get some volatility and a short-term correction.
Either way, there is still value lower down in the Aussie market. It’s just that it’s ‘hidden’ behind analysis and commentary around the major blue chips.
Don’t let this obscure the opportunities that are still up ahead.
Best,
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Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
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