Buy Hold Sell: 3 micro-cap buys (and 2 facing headwinds)

After a few months of episodes at the top end of town, the team here at Buy Hold Sell thought we would take a trip along the road less travelled. 

Why? Well, micro caps are often under-researched, undervalued and underappreciated by investors. This means these stocks can potentially produce outsized returns - far greater than those seen in the large-cap end of the market. 

But not all micro caps are created equal. These companies are often far less transparent, far less liquid, and can carry a hell of a lot more risk. 

So in this episode, Livewire's Chris Conway makes his Buy Hold Sell debut alongside 1851 Capital's Chris Stott and Yarra Capital Management's Joel Fleming for a look at three undiscovered micro-cap gems. 

Plus, they also each name one much-loved micro-cap with serious headwinds on the horizon.  

Note: This episode of Buy Hold Sell was filmed on Wednesday, 14th September 2022. You can watch the video, listen to the podcast, or read an edited transcript below.

Edited Transcript 

Chris Conway: Hello and welcome to Livewire's Buy Hold Sell. My name is Chris Conway. Over the past few weeks during reporting season, we've analysed the top end of town quite a lot. So today, we're going to take the road less travelled and talk about three undiscovered micro caps and two that aren't worth their salt. To do that, I'm joined by Chris Stott from 1851 Capital and Joel Fleming from Yarra Capital Management. 

The first stock that we'll talk about today is Capitol Health. It runs a network of diagnostic imaging clinics. It was once a market darling. Chris, we'll start with you. Is it a buy, hold, or sell?

Capitol Health (ASX: CAJ)

Chris Stott (BUY): It's a buy for us, Chris. It's the biggest holding in our fund 1851 Capital. As you said, it's primarily a radiology business run out of Melbourne and Perth. Net cash on their balance sheet, trades on six times EV/EBITDA. We've seen other businesses transact in the space anywhere from 12-14 times EBITDA. So Justin Walter, a really good CEO, has turned the business around and it's performing very, very well. So it's a buy for us.

Chris Conway: Joel, what about you? Capitol Health. Is it a buy, hold, or sell?

Joel Fleming (BUY): I'll have to agree with Chris here. It's a buy. There's a great long-term structural story there. Ageing populations, really good footprint, market, and it just trades too cheaply for the assets that it has.

iCollege (ASX: ICT)

Chris Conway: Joel, we'll stay with you. The next stock that we're going to talk about is iCollege. These guys provide educational experiences. They educate about 22,000 students per year. Is it a buy, hold, or sell?

Joel Fleming (BUY): It's a buy. One of the best risk/reward opportunities in the market right now, in my opinion. We've got more international students coming into the market. These guys have built a great business and their ability to fill their facilities, have people coming in with the English language, and then move further through the courses. Strong balance sheet, great management team. Thematically, there's a structural tailwind about to come through, and they've got the cost base in place. I think it's a buy.

Chris Conway: Chris, what about you? iCollege, is it a buy, hold, or sell?

Chris Stott (BUY): Buy. So echoing Joel's comments there. This company's in the beautiful position that they've got extraordinary demand for their product in the form of students coming back into the country post-COVID-19. They can travel again, they're having to add capacity in the form of new facilities to house a lot of these students. So again, strong balance sheet, very well run, with the merger with RedHill not so long ago, so buy.

SRG Global (ASX: SRG)

Chris Conway: Chris, we'll stay with you. The next stock is SRG Global. It's a mining services company. The share price has gone crazy. It's gone from about 20 cents in early 2020 to currently being north of 70 cents. Is it a buy, hold, or sell for you?

Chris Stott (BUY): Buy. It still remains quite cheap to us. Very well-run business again, executed very well. Mining services business based out of Western Australia, won numerous contracts, have made some successful acquisitions. Growing their earnings by 20-25% consistently over the last few years. Still underappreciated in our view by the market, so buy.

Chris Conway: And Joel, SRG Global. Is it a buy, hold, or sell?

Joel Fleming (BUY): It's a buy. Agree with Chris. I think they have a really good management team, niche exposure to growing industries, and the order book will continue to grow. Undervalued by the market, and it's a buy.

2 micro-cap darlings facing headwinds

Chris Conway: We've also asked the fund managers to bring along a microcap that is loved by the market but might be facing some headwinds. Joel, we'll stay with you. What is the stock that the market loves that you are not so sure about?

Joel Fleming (SELL): Little bit controversial, but I'm going to go with Austin Engineering (ASX: ANG). The new management team have really turned the business around and made a really accretive acquisition. But I feel that the market is getting ahead of itself and working into this macro environment, things will get a little bit tougher from here.

Chris Conway: Chris, a stock that the market loves that you are not quite so sure about. What have you got for us?

Chris Stott (SELL): I've gone with Cettire (ASX: CTT). We've seen the founder sell down over the last 12 months at $1.40 a share, when the share price had cratered into it, which was the first red flag for us. It trade's around $1 a share today. Looking at their balance sheet, they're burning cash at a fast rate. Working capital has blown out. It looks as though they'll need to raise fresh equity if that working capital can't translate into cash over the coming period. So that one's an avoid for us.

Chris Conway: Well, that's all we have time for today. We hope you enjoyed that episode of Buy Hold Sell based on microcaps. If you did enjoy it as much as we did, make sure to give it a like and also subscribe to our YouTube channel because we're adding great new content every week.

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