2 big buys (and why the worst could be over for small-cap investors)

What we got wrong there were execution issues, particularly about the growth strategy, and that led to some management changes. And I think the key insight there is where you've got a company that's unprofitable and still burning cash, you need a big margin of safety around valuation.

Mike Younger: For us, Smartgroup Corporation (ASX: SIQ) was one that we got wrong. We liked it for its strong cash generation and defensive earnings stream, and we thought we'd actually get kickers coming out of new vehicle supply normalising and also an efficiency program they're running that's designed to add 15% to 20% to earnings. But what we got wrong there was the timing of that supply chain unwind, which we're still waiting on. And over that time as well, you've had inflation pop up and the impact that inflation's had on their business specifically has been more than we expected it to be. And so that's eaten into profits and eaten into some of these benefits from the efficiency program. 

Sectors that are currently looking attractive 

Mike Younger: We like the travel sector for its strong earnings momentum. We like profitable tech where you've got defensive and predictable earnings growth. And we also liked aged care, which is a bit bombed out at the moment, but we think that there's a catalyst there with government stimulus likely to step up and that should see these companies generating returns on capital that get some way back to where they used to be.

Katie Hudson: So when we think about the investment horizons, it's probably three or four years. And against that backdrop, we think we're going to be in a low-growth environment. So it's going to be really interesting, I think, to focus on companies that can generate cash, that compound earnings growth and that can take market share. So with a lot of those companies selling off last year, we think there's a lot of opportunity in that growth part of the market. To Mike's point, technology, some of the financials, and we're finding a lot of opportunity there.

Sectors to avoid

And so from a valuation standpoint, when we look at where the peers are trading, News Corps is on about a 30% discount on a sum of the parts basis. But the interesting bit is when we strip out realestate.com.au which is traded on a daily basis, we have a clear valuation priced every day there. Stripping that out, the rest of the business, which is two-thirds of group earnings, trades at about a 75% discount to its peer group. And so we think that the risk-reward there is extremely favourable for investors.

Sandfire Resources (ASX: SFR)

Katie Hudson: So I'm going to go a bit different. So we have a resources research capability as part of our team. We've added a lot of value in that part of the market. I know some small-cap investors don't cover it, so that's one that I thought I'd call out. Copper is a commodity we're really positive about over the longer term. It should be a beneficiary of the energy transition. And unlike some commodities like lithium, it is trading much closer to its marginal cost of supply. It's difficult to access supply, so that should support the commodity price over time. And with OZ Minerals now under takeover, it's hard to find really good exposure. So we think Sandfire Resources (ASX: SFR) will be a winner there. They've got two really good mines. They've got good long life with those mines. They're a quality cost producer. They've recapitalized the balance sheet and are having board and management renewal, which we think will be positive as well. So copper and Sandfire.

If you had to go all in on one stock, what would it be and why? 

Katie picked Sandfire Resources and Mike named News Corp, but what about you? If you had to put all your eggs in one basket, what stock would you choose? Let us know in the comments section below.