12 winners from Wilson Asset Management's Oscar Oberg

Oscar Oberg is voraciously bullish on small caps. And when you consider WAM Microcap Ltd returned 48.1% (before fees) over a 12-month period - an outperformance of 30.9% compared to its benchmark, the S&P/ASX Small Ords Index - one can perhaps see why. 

Since the fund's inception in June 2017, it has generated an annual return of 24.7% for investors (also before fees). Not bad, compared to the Index's 10.5% - and particularly impressive, given the S&P's SPIVA results show that 53.4% of Aussie small- and mid-cap funds underperformed their benchmark on a three-year basis.

The key to similar success, according to Oberg, WAM's lead portfolio manager, is blowing the dust off your crystal ball and thinking long-term. 

"The best lesson I received from some of my mentors is always thinking 12 to 18 months in advance - and always backing your own view," he says.

The market is flooded with a deluge of different views - from stockbrokers, various investment managers and the media, he notes, which can "pollute" your ideas. 

"The best ideas always come from you," Oberg says.

"And so if you're always thinking 12 to 18 months in advance, that means you're thinking longer-term and you're thinking about sectors that perhaps no one is in or thinking about at this point of time." 

Aside from this little nugget of wisdom, Oberg also shares 12 small-cap ideas he and his team are currently exploring, as well as the one stock he believes can rise up the ranks of the Small Ords Index and hustle its way into the S&P/ASX20. 

Now that's something to get excited about. 

Note: The video below was filmed on 10 March 2021. Watch the video or read the feature based on it below. 

Why now is small-caps' time to shine

According to Oberg, the positive macroeconomic data coming out of Australia and New Zealand bodes well for small and micro caps. 

"We definitely think it's the best environment we've seen in small caps for some time," he says. 

"That largely relates to the fact that around 50% of the small-cap industrial companies that we look at are exposed to the Australian economy in some way across sectors such as retail, automotive and also building materials."

Positive news on the economic data front will help "fuel" these companies going forward, Oberg says, particularly those that are cyclical in nature or traditional Value plays. 

Why businesses with COVID-smashed operations will outperform 

Going forward, Oberg believes companies with operations or exposures to the United Kingdom and the United States will outperform.

This is thanks to the disproportionate impact of COVID-19 in these regions, as well as the speed at which governments have administered the vaccine. According to the BBC, more than 23 million people have received at least one dose of the vaccine in the UK, while 107 million people had been vaccinated in the US (according to USA Today). 

Companies with exposures abroad that tickle Oberg's fancy include:

• Pendal (ASX:PDL) 
• Virgin Money UK (ASX:VUK),
• Reliance Worldwide (ASX:RWC),
• Corporate Travel Management (ASX:CTD) 
• Flight Centre (ASX:FLT).

Virgin Money UK, formerly the old Clydesdale Bank owned by NAB, is the largest position in WAM Capital. 

According to Oberg, it's cheap, "trading at a 30% discount to its book value" and has significant room to run once lockdowns in the UK ease. 

"We spoke to a number of UK banks globally and I don't think it could have been more negative at the time," he explains. 

"You could see in terms of what these banks had done, they had heavily provided for problem loans through 2020 ... 

And I think you only had to look at the Australian banks as an example of what they've done nine months earlier, and clearly, the outlook for Australia is a lot better and we're starting to see these provisions written back." 

Oberg is banking on a strong economic recovery in the UK - which will kick-off a credit growth cycle in the region and ultimately benefit Virgin Money. 

In vitro veritas 

Oberg also noted that the WAM team had been working with companies to see how they are adapting to the "new digital world". 

After all, it's been well reported that we have seen 10 years of digital uptake in all but 10 months. 

Oberg provides Virtus (ASX:VRT), one of the largest IVF players in Australia, as a company that has successfully adapted to the new digital environment. 

"Previously, they were looking at rolling out IVF clinics globally. Now they're thinking about licencing their technology through their precision fertility capabilities to other IVF players globally," he says. 

"So this is a revenue stream, which is low capital intensive, doesn't have many expenses to it ... And we believe this could potentially bring some significant upside over time to Virtus. So that is an example of what we're looking at across the companies that we own."

Move over digital acceleration, ESG is the next major structural trend

Oberg is steadfast that the focus on Environmental, Social and Governance factors is only going to continue, pointing to major consumer-facing companies like Coke (ASX:CCL) (committing to dropping PET bottles) and a consortium led by Macquarie (ASX:MQG) bidding around $3.50 per share for recycling and waste company Bingo Industries (ASX:BIN), a 28% premium to what shares in the company were trading at the time ($2.29 billion in total). 

One company well placed to benefit from this ESG theme is Pact Group Holdings (ASX:PGH), Oberg says, which has disappointed shareholders in recent years, but is now on the mend. 

"There's a clear coherent strategy to increase its exposure to recycling plants," he says. 

"And we believe this will improve their competitive positioning with their customers going forward. So we quite like that company."

Also, shove along Afterpay ... 

When asked what company he believes will be able to weasel its way out of the Small Ords Index and slowly climb the ranks to the top 20; the next Afterpay if you will, Oberg offered up Link Administration (ASX:LNK). 

(I know. I was quite - read: very - surprised, too.) 

However, it's not Link's funds' administration business that has Oberg excited, its the firm's 44% investment in PEXA, Australia's sole digital e-conveyancing business. 

"Now why we like PEXA is, if we go back in time when they tried to have their initial public offering at the end of 2018, the numbers have consistently beat those forecasts," Oberg says. 

"So if we have a look at Link's recent first-half result, earnings from PEXA was around $50 million. So it's actually tracking ahead of forecast and actually has over 75% market share in conveyancing in Australia." 

Oberg believes this technology has the capacity to go global, with the UK being first on the list. 

"We always try to find a business that could expand globally and then potentially has a valuation that might be on the high side to get into the ASX20," he says. 

"That's certainly won't happen tomorrow, but I'm going to say Link Administration, but it's really PEXA, their investment." 

Another undiscovered gem that has solidified its place in the WAM Microcap portfolio is Enero (ASX:EGG), an advertising company that struggled from 2007 up to 2016-2017.

"Management did an incredible job fixing balance sheets, selling non-profitable businesses and so forth, but the business fundamentally changed," Oberg says. 

"So it has strong exposure to the tech companies in the US through its public relations company called Hotwire. And it also has a digital platform for advertising called OBMedia." 

It's this business, OBMedia, that really shot the lights out in Enero's first-half results. 

"So we think the balance sheet is incredibly strong, we see the ability for acquisitions going forward and the valuation is still very cheap," Oberg says. 

"It's on around eight or nine times-PE and it's net cash. So we really liked that one and that's our biggest holding in WAM Microcap."

Pre-IPO investing and the key to discovering opportunities beyond the ASX

For pre-IPO investments to catch Oberg's eye, a company needs to demonstrate it can grow strongly above its valuation, be in a flourishing sector or market, and boast an experienced management team. 

"The management team for pre-IPO investing is incredibly important," he says. "We want to know the history, we want to speak to the board, but the most important thing is we want the management team aligned with us.

Are they doing a pre-IPO just to cash out, for example, or perhaps instead, they truly are raising cash to accelerate growth, Oberg says. 

"For these reasons, we're very picky across the pre-IPO investments that we participate in. And we want to see alignment from the management team for that company." 

One such example of a pre-IPO investment is Xpansiv, Oberg explains, which is essentially a trading platform for carbon credits. 

"There are some very big shareholders that are already on the register which gives us greater confidence and it's a business that's been around for a long time, it's been very entrepreneurial," he says. 

"They've done the hard yards and we are certainly seeing the benefits coming through in the numbers. So I think we might see an IPO of the company later in the year. It's certainly one that we're quite positive on."

And the importance of being on top of the risks 

Oberg argues that the past 12 months have been nothing short of insane, and I tend to agree - as I am sure you all do, too. 

"What's keeping me up at night? It's just been a crazy 12 months. In March you had COVID, in April you had the COVID recovery, in November you had the vaccine, and now you've got the shift from growth to value," he says. 

"So I guess waking up every night and trying to work out, are we going through another rotation again in the market." 

He points to inflationary risks as being high on his radar, resulting in all his portfolios being highly liquid over the past 12 months. 

"Now we don't think there's cause for concern yet. And we think inflation is actually a pretty good thing, really, because it's a reflection of economic growth," Oberg says. 

"So it's definitely not panic stations yet, but I think that's certainly what we're watching very closely. And it's a big reason why we're underweight the tech sector."

He also points to frothiness in the tech sector, particularly among those companies loved by retail investors. 

"Without sounding like a broken record, because we have been negative on the tech sector for some time and have been totally wrong. But ... there's just some craziness in the market at the moment. Companies that aren't making money, aren't ever going to make money," Oberg says. 

"People love Elon Musk and Tesla and they're trying to find the next company like that. That's what worries us. There are just so many pretenders in this space. And there just seems to be a total disregard for valuation at the moment in the market. 

"This is why you're seeing these huge spikes on a daily basis. It makes it incredibly volatile." 

He also notes that a key reason why WAM won't be buying any of the dips in the tech sector is that the divergence between growth and value is still the highest it's been in 50 years. 

"We think we're going to have a very strong period of economic growth, we'll see inflation, and that will hit the technology sector," he says. 

With this in mind, Oberg revealed he had sold out of one of the largest holdings in the fund, Redbubble (ASX:RBL). 

"It was a hard one because we'd done very well out of the stock, and we could see the stock upgrading earnings over the next few months, it had a very strong balance sheet, but we just thought the market had changed," he says. 

"Our other concern with it was when you stripped out the mask revenue that they were getting, their core business wasn't actually growing as fast as we thought. And it was actually cycling a very weak period 12 months earlier." 

So, WAM sold out of Redbubble at around $6, he said. 

"It's around that mark now. It does have a very good CEO, a very strong balance sheet," he says. 

"So time will tell whether we're right or not, but we're certainly happy with our decision to sell out." 

Bonus round: An exciting sector for 2021

Other than the promise of a holiday, Oberg is also excited by the potential he sees within Australia's aged care sector, which he believes has "bottomed" and "couldn't get any worse". The Royal Commission into Aged Care could also have positive ramifications on the aged care sector, he adds.  

"We quite like Estia Health (ASX:EHE) here, which is quite a large position across WAM Microcap and WAM Capital, it's got a very strong balance sheet. And we also like Regis Healthcare (ASX:REG) which plays this theme as well. And they also benefit from higher property prices," he explains. 

"So that's a sector that we're quite excited about and it's a sector that we think is forgotten about in the market." 

What small-cap company are you loving? 

We would love to know what small-cap businesses you believe are set to boom. Let us know in the comments section below. 

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