Hi, it’s Charlie Ormond here. I’m one of the editors here at Fat Tail Investment Research.
We’re doing something a little different today.
I’m sitting down with our small cap analyst Callum Newman and quizzing him on the latest market developments.
Callum’s subscribers have had some ripping opportunities this year. And talking to Cal, it’s clear he sees plenty more coming up too.
With all the action I just had to start this chat with DroneShield. This has been the ultimate rollercoaster in the last few weeks.
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Cal, thanks for sitting down with me.
You recently took profits in DroneShield after a huge run up in the price. It kept going up after you sold…now it’s down 40% in the last week or so.
What’s going on?
Thanks, Charlie. DroneShield has been a belter of a small cap stock this year. You don’t get a gigantic run up like that very often.
My subscribers had the chance to double their money…and then some…in less than six months on that one.
But you’re right, we sold out of it — too soon, in hindsight. It really kept melting up for a month afterwards. However, reality might be catching up to it now.
How so?
Drones are an exciting thematic, no doubt, and DroneShield certainly has the platform in place as a business to exploit this.
But the recent valuation was very stretched considering its low profitability.
Sometimes market expectations become so high that it’s almost impossible to fulfill them in the short term.
That’s what we saw on Monday when the stock got walloped 20% on its latest quarterly report.
However, DRO remains an interesting proposition. Certainly, I’m going to continue to follow their progress with keen interest.
They have a latent ability to release ‘big news’ at any time. I love that in any stock, but especially a small cap.
Besides DRO, how is the small cap sector faring in 2024?
It’s certainly not a ‘red hot’ small cap sector.
However, relative to this time last year it’s a marked improvement, I can tell you.
We’ve had some very tidy gains in other shares — Tuas and Nuix spring to mind. But the sector is still stuck in second gear in terms of sentiment and volume.
However, if you have the long term in mind, now’s the time to consider building up your exposure while things remain suppressed.
So what’s holding the small cap sector back?
Interest rates are one thing. If we go back to January, the small caps really lit up when the market was pricing in 5 to 6 rate cuts in the US and some here.
Those projected cuts fizzled out fast. The market doesn’t expect cuts in Australia until 2025 now, with a rise possibly still in play. That put the brakes back on.
However, I think it’s a mistake to obsess over something as unpredictable as interest rates. DroneShield is a perfect example of a ripping gain you can make even with higher rates in play.
Of course, I can’t guarantee every recommendation will skyrocket like DRO. These are small caps, so they are more speculative.
But, Charlie, over the years, I’ve learnt it’s individual business factors that matter the most. You can send yourself barmy trying to time the market, rates, sentiment and whatnot.
Plus, if you wait until everything looks hunky dory, you’re probably late to the party.
How important do you think the US election is to small cap investors?
It will dominate headlines for the next six months, clearly.
Generally, I would dismiss the Presidency, and the election, as more show than substance.
However, one aspect of Trump’s campaign can’t be ignored…and that’s the idea he could slash US corporate taxes further…or at least extend his previous cuts.
That clearly impacts the profitability of US corporations, which has to get factored into share prices by pushing them up further if it happens. Gold may also get a tailwind from projected higher deficits too.
The tricky part is we can’t know if he will do anything he says.
So, there’s some impact, however, elections are an ephemeral factor and US corporate taxes have limited impact here really.
Better to think of how each ASX company might look in 2025 and 2026 and beyond.
What about the Aussie economy, if we were to take the temperature right now what would you say?
It’s holding together OK. I don’t spend a lot of time thinking about the economy, because it’s largely an abstraction.
A company can make a lot of sales in a ‘bad’ economy or still stuff it up in a ‘good’ economy.
The other thing is that it’s a gigantic mistake to assume every stock on the ASX has something to do with Aussie economy in the first place.
Some companies make most of their sales in the USA, for example (DRO being one of them, actually). Or they have expansion plans in Asia or the EU.
Or perhaps they operate in a niche market, like the mining sector. The overall level of Australian demand is irrelevant. But what’s going on in mining is paramount.
Again, you have to know what drives each stock, and what the market is pricing in now, and how that might change.
Your buy list is looking very green right now, overall, and you were correct to call the market heading up last year. What is something that you have got wrong?
As you say, generally I’ve got the broad brushstrokes right, at least in the last 12 months or so.
That said, I get stuff wrong all the time. We all do. Markets are hard!
I’ve been bullish on the non-bank sector for way longer than any sane person. In fact, apparently, I’m the only one that cares about these stocks anyway.
Last year, I assumed a recovering housing market and growing investor credit would lift these stocks out of the dumps…but, nope. They’re as flat as a pancake still.
Small cap investors and punters love mining stocks. But it’s also notoriously volatile and dangerous. How do you approach this sector?
You know, Charlie, there’s a former AFL coach called Malcolm Blight that used to let his players use the torpedo kick.
It’s harder to execute so the margin for error is wide, but when you get on to one, it can go a country mile.
As I said, Blighty would let his boys have a crack at the torpedo. But if wasn’t working they had to put the kick away for the game and go back to the drop punt.
I think of mining stocks like that. You can dust serious money here, but I believe there’s no better sector for profit potential.
So I’m happy to selectively have a crack when the conditions seem right, but I don’t want to do it all the time, either.
My friend Hedley Widdup manages a mining fund.
He was a great help guiding me away from the sector around 2022 into 2023 when most mining juniors got flogged something shocking.
The cycle is turning back upward so I expect to be more active here going forward. It’s another reason to be very excited Charlie.
Australia is blessed to be so rich in resources…and for investors to have this breadth of opportunity in front of them. Not many countries have the same I can assure you.
What’s a risk you think the market isn’t watching?
You know, a friend of mine is American, and he was warning recently that parts of the US might become uninsurable from increased hurricanes and floods as the climate warms.
His point was the American economy is built on property, and it’s true.
It’s the same in Australia.
Any threat to the core base of the asset markets — and that’s property Charlie, not shares — has to be considered carefully.
Climate change policies are an obvious threat to coal and fossil fuel producers but even manufacturers that produce a lot of emissions.
It may not be today or this week, but that kind of overhang isn’t going away.
AI is another source of concern. Any shares you hold could take a massive hit if the market sniffs out disruptive potential and lost earnings and growth. That’s something to watch for carefully too.
That said, you remain very excited for the small cap sector in the next few years, right?
Charlie, absolutely.
The last six months or so is just a warm-up in my view.
There’s every reason to think capital is going to come back to the small cap sector in a bigger way and chase the higher growth potential here. Now’s the time to get set for 2025 and 2026.
The biggest problem we’re all going to have — in fact, I already have it — is the number of potentially profitable ideas relative to how much money and time we can throw at all the opportunities.
That said, it’s a good problem to have. It sure wasn’t like that over 2022 and 2023.
Now’s the time to make the most of opportunity.
Thanks for your time today Cal.
It’s been a pleasure, Charlie.
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Regards,
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Charlie Ormond,
Analyst, Alpha Tech Trader
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