13 undervalued ASX stock ideas across small and large caps

To round out what has been a big 2024, we have been sitting down with a handful of fund managers for their assessment of the year that was and, more importantly, their outlook for 2025.

What will stay the same, what will change, and what path will the market take to get there? And what are some stocks that could help investors along the way?

To help answer those questions, I spoke with Tyndall Asset Management’s James Nguyen and Jason Kim. Together, they represent most of the ASX market cap spectrum, covering small-caps and large-caps, respectively.

With the market near all-time highs, what does the opportunity set look like in small and large caps?

Nguyen highlighted that the Australian small cap index remains 10% below its 2021 peak, while large caps have largely driven recent market rallies.

“The small cap index is trading at a 10% discount to the ASX 200, compared to a historical 5% premium,” he noted.

He added that small caps are forecast to deliver double the earnings growth of large caps, presenting potential value despite the market's overall high valuations.

Kim observed that the overall market is trading at elevated multiples—about 18 times earnings compared to the historical 14–15 times range.

However, he emphasised that not all large cap stocks are overpriced.

“Cyclical sectors like mining, energy, and even healthcare have lagged,” he said.

These areas, along with specific stocks, offer attractive valuations compared to the broader market.

Is the run over for the big banks?

Whilst the banks are fundamentally solid according to Kim, he argues that their valuations have reached unreasonable levels – a sentiment commonly held amongst most fund managers.

Kim sees the run up in the banks as akin to bidding on the best house on the street in an auction; “there’s a point at which you say, 'hang on, that price is ridiculous, I’ll go somewhere else'”.

“I think we are already at that point in a big way”, says Kim.

“CBA is trading at 27 times earnings, far above its typical multiple of 18,” he added, noting the momentum-driven nature of current buying trends.

When asked about signs of potential weakness in banks, Kim noted net interest margins (NIMs), bad debts, and earnings outlooks. However, he added that the current rally seems more flow-driven than fundamentally based.

“It’s been about resources declining and money flowing into banks as a perceived safe haven,” he explained.

High-conviction stock picks

Getting right to the good stuff, Nguyen and Kim shared some high-conviction stock picks in their respective cap ranges.

Small cap - Zip Co (ASX: ZIP)

Nguyen shared his strong conviction in the buy-now-pay-later turnaround story Zip.

“New management shifted from aggressive international growth to a sustainable profitability strategy,” he explained.

According to Nguyen, Zip has a significant runway for growth with buy-now-pay-later penetration in the US at just 2% compared to 15% in Australia.

Trading at 30 times two-year forward earnings, it also remains at a healthy discount to US peers.

Large Caps: QBE Insurance (ASX: QBE) and Amcor (ASX: AMC)

Kim spotlighted two large cap picks:

QBE Insurance: “QBE is trading at 11.5 times earnings compared to the market’s 18 times,” he noted.

Improved management, stable interest rates, and normalised weather conditions position it for further growth. Kim suggested that QBE has up to 20% upside from here.

Amcor: Global packaging giant Amcor's recent acquisition of Berry offers material synergies, with $650 million in cost savings expected, according to Kim, who added that given their track record with acquisitions, there’s no reason to doubt that they can deliver on that number.

“Amcor has a track record of delivering on synergies, and we see it being worth $20 per share,” he said, emphasising its defensive nature and growth potential.

A stock with the power to surprise

Small-cap tech exposure

Nguyen highlighted that tech and value investing are typically not associated with each other, but Tyndall focuses on intrinsic value rather than academic value.

As such, the focus is on mispriced future cashflows which leads the small cap fund to have an overweight in tech given it can find quality compounders trading at reasonable multiple.

He went on to highlight three names which fit the bill: Data#3 (ASX: DTL), ReadyTech Holdings (ASX: RDY), and Hansen Technologies (ASX: HSN).

Large cap: CSL’s Transition to Value

Kim nominated CSL Limited (ASX: CSL) as the large cap with the potential to surprise.

While the company has traditionally been a growth darling, Kim says it can now be viewed as undervalued by intrinsic value standards.

Despite trading at a premium (26.5 times earnings), its growth potential and defensive nature justify a higher valuation.

“We see 20% upside [target price of $350], driven by improvements in its core plasma-based business and operational efficiencies,” Kim explained.

Underweight large cap tech

While Nguyen is finding intrinsic value in small-cap tech names, the story is different in large-cap tech.

Kim notes that the sector poses challenges due to its high valuations, especially among large-cap names like WiseTech and Xero.

“No matter how aggressive you get in your EPS growth assumptions, it's very hard to get those to stack up,” noted Kim.

And while the Tyndall Australian Share Wholesale Fund doesn’t have any direct tech exposure, the portfolio still includes a handful of names that are plugged into the theme.

For instance, Goodman Group (ASX: GMG) was touted as a viable alternative. While it is not traditionally classified as a tech stock, its data centre rollout ties it to tech trends.

The Fund initially invested in GMG earlier this year, benefiting from favourable valuations at the time.

What other sectors are appealing in the small cap world?

The Tyndall Australian Small Companies Fund is currently leaning heavily on industrials and financials, driven by a quality value-centric process, noted Nguyen.

He added that such a focus avoids non-producing, cashflow-negative miners in favour of industrial companies tied to the resource sector.

For example, SRG Global (ASX: SRG) and Southern Cross Electrical Engineering (ASX: SXE) offer attractive valuations and double-digit earnings growth.

“We're able to buy these businesses on single-digit earnings multiples, with double-digit earnings growth” explained Nguyen.

When it comes to financials, while the fund is overweight, it isn’t necessarily on a thematic view. Rather, as Nguyen points out, the team is bullish on the US consumer, and it just so happens that there are a handful of stocks that fit that view.

Nguyen highlights the already discussed Zip, as well as Credit Corp (ASX: CCP) as exposures to the thematic, noting that these companies provide exposure to the lower end of the US consumer, “where we believe the market continues to underestimate the resilience of the US economy”.

Recent changes to portfolios

Whilst the funds have not undergone any wholesale changes in recent months, Nguyen and Kim did highlight some recent tweaks.

In small caps, Nguyen flagged that his fund is considering closing its underweight in resources.

This stems from divergent calendar-year returns, with industrials delivering 16% and resources only 1%.

“You don't make money following the crowd,” noted Nguyen.

In the large cap space, Kim highlighted the relatively recent addition of gold exposure, via Newmont Mining (ASX: NEM).

The stock has been picked up amid price dips and downgrades, and while Kim admits that it has been a “wild ride,” he adds that it highlights the Fund’s readiness to act when valuations align, and he’s sticking with the thesis.

Fun questions

Nguyen and Kim were proposed a couple of ‘fun’ questions to round out the session.

Which famous figure does your fund embody?

In a laugh-out-loud moment, Nguyen likened his fund to Eric Roberts, Julia Roberts’ less famous brother: hardworking, consistent, and under the radar.

"We aren’t the flashiest fund, but we leave no stone unturned and have delivered consistent returns."

Perhaps you have to be an 80’s kid to get the reference.

If you were buying shares as a Christmas gift, what would you buy and why?

Kim proposed Suncorp (ASX: SUN), citing its strong brand portfolio and defensive qualities in personal insurance.

“Can any of us let go of our home or car insurance?!” noted Kim, adding that Suncorp offers solid potential for long-term investors with rising premium rates and a focus on capital management.

Managed Fund

Tyndall Australian Share Wholesale Fund

Australian Shares

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Managed Fund

Tyndall Australian Small Companies Fund

Australian Shares

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