Livewire: How fund managers are tackling the great regime change in markets
This article was published by Livewire Markets on 22 August, 2022.
David Wanis, Longwave Capital Partners CIO shares two ASX small caps with the quality to weather the storm
Small-cap investors know their field intimately, especially the companies in which they choose to invest in. As we enter this changing world order, Wanis says small-cap investors need to remember the one key constant: quality comes from experience, not from businesses actively jumping on new fads.
“Remaining disciplined in ensuring your investments are in real businesses, generating and growing cash flow, with strong balance sheets and managed by capable and aligned executives is often harder than it seems,” Wanis says.
This is particularly true in the world we now live in. As interest rates begin to rise steeply around the globe, so does the cost of capital and servicing debt. After more than a decade of free money, companies with large debt holdings and small margins on their balance sheets are being tested more than ever.
Change also brings uncertainty – and if there is one thing investors unilaterally hate, it’s uncertainty. However, investors also love chasing the next great prediction but Wanis argues that this consistent chase is a sign of investing bias.
“Overconfidence remains a stubborn behavioural bias. Portfolio concentration sounds like something that should work – after all, who wants to invest in their 26th best idea?” He adds that be it running an extremely concentrated or diversified portfolio, it’s the skill of the manager rather than the number of stocks in each fund that separates the good fund managers from the great.
So, if skills are so important, then where are the best small-cap opportunities going to be found from the end of 2022 onwards? Wanis says it’s all about finding companies that deliver real value while still bearing a cheap price.
“Two stocks that are examples of this opportunity are New Zealand transport company Mainfreight and Australian mining technology company Imdex,” Wanis says.
“Mainfreight (NZX: MFT) has delivered to shareholders everything the disrupters promise but few achieve. After 45 years in business, they still have a huge runway of growth in front of them as their North American business is today the same size as their NZ business, in a market more than 50x as big,” Wanis argues.
“Imdex (ASX: IMD) shows that innovation can successfully be done inside a profitable and growing business,” Wanis says.
“If successful, their investments will lead to 1) much larger revenue, 2) sustainably higher margins and 3) a more predictable business. Success in any one of these will create meaningful value not currently reflected in the stock price. Should they deliver two or all three outcomes, the upside is significant,” Wanis adds.
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