Pockets of opportunity in small caps but earnings risk a factor
Mike Younger
There are pockets of opportunity in small caps, with parts of the sector trading at discounts compared to their large cap counterparts, but investors need to watch the potential for earnings risks according to a small caps investment specialist.
Mike Younger, Portfolio Manager in the small caps team at Prime Value Asset Management, which manages the outperforming Prime Value Emerging Opportunities Fund, said while there looked to be bargains available investors need to look beyond valuations. “Some small caps may look cheap on the surface. For example, the small industrial companies are at pre-Covid lows and trading at more than 20 per cent discounts compared to large industrial companies.
“One third of small cap stocks in our portfolio are on a PE of 13 times or lower. But PE only tells part of the story – investors need to dig deeper and find companies which are well-managed and resilient.
“We know small caps investors are rewarded by looking beyond valuations alone to understand the management and the underlying quality of the business.
“There are still earnings risks in small caps, with some uncertainty on the horizon including the possibly of global recession.
“Investors need to consider the sustainability of company earnings, and factor in issues around interest rates, inflation and debt. There are pressures on household budgets, with rents increasing and interest rates rises still working their way through the economy.”
Mr Younger said such market conditions made cash-generating companies more attractive. “The great thing about small caps is that there are always pockets of opportunity in any market.
“There is currently opportunity to buy cash-generating businesses at relatively favourable multiples.
“There are some interesting companies operating in the travel sector, which is looking healthy post-Covid.
“Aged care also looks interesting. And profitable technology companies are attractive as that sector experiences a re-rating of risk.”
The Prime Value Emerging Opportunities Fund takes a high conviction, benchmark unaware approach, with approximately $120 million funds under management, and is managed by boutique investment manager, Prime Value Asset Management.
Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing over $2.5 billion in equities, income securities, direct property and alternative assets.
