Buy Hold Sell: 5 small caps chasing big markets

Companies developing products for massive end markets are one of the hottest vectors of opportunity in the market right now. The idea is simple: develop a product or solution that requires a relatively low fixed cost but meets the needs of a large population.

In this episode of Buy Hold Sell, Chris Stott of 1851 Capital and Gary Rollo from Montgomery Investment Management debate three small caps ripe for this thematic. They include 1) City Chic Collective - A specialty fashion retailer benefiting from the shift to online sales; 2) Megaport - A leading network-as-a-service provider; 3) EML Payments - A specialist in general reloadable and gift card payment solutions.

We also asked each of our guests to nominate a small cap stock with a big opportunity that they think looks attractive right now.

Notes: Watch, read or listen to the discussion below. This episode was filmed on 9 August 2020.

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Edited Transcript

Matthew Kidman: Welcome to Buy, Hold, Sell brought to you by Livewire Markets. I'm Matthew Kidman. And today we're going to talk about small companies with really big ambitions. And joining me to have a chat is Gary Rollo from Montgomery Investment Management and Chris Stott from 1851 Capital. Chris, we'll start with you. City Chic, it's online, it's larger clothes for young people. It's a growing industry. Buy, hold, or sell?

City Chic Collective (ASX:CCX)

Chris Stott (Buy): Buy, Matthew. Really high-quality management team led by Phil Ryan. As you said, online business growing at a very fast rate. They've recently entered into a deal, they took over a business called Catherines. They've over-raised in terms of equity. So, there's a potential for a second deal to occur down the track. So we're quite likely to buy.

Matthew Kidman: Gary, Australian company telling Americans how to dress. Buy, hold, or sell?

Gary Rollo (Buy): It's a buy for us too. We simply look at the big economics of a large market going from offline to online. And we love the market share taking capabilities of this management team and business model. As Chris said, the balance sheet's prime for adding in inquisitive growth. It looks like a good strong winner for us.

Megaport (ASX:MP1)

Matthew Kidman: Okay. Let's jump into an area you know well. Data centres, the cloud, Megaport, appropriate name. Taking on the world in that area. Buy, hold or sell?

Gary Rollo (Buy): Megaport's a buy. Look, this company has an interesting proposition, not just here in Australia, but globally. And as the name suggests, it's solving a problem that wasn't around yesterday. Corporate computing networks were designed for the old age. In the new world of cloud, you don't know what you've got to connect to and when. Megaport solves that problem and it solves it in an elegant way. It's got a huge addressable market. And for us, that's one of the most interesting tech stories on the ASX and globally today.

Matthew Kidman: Megaport, mega by name, mega by price. Went up about 120% since the bottom. Chris, buy, hold or sell?

Chris Stott (Sell): Sell. So really good company, Matthew, but the valuation is incredibly stretched to us. 26 times revenue, yet to be positive in terms of from an EBITDA perspective. So, we think it's certainly had a strong run, as you mentioned, off the lows in March. So, sell.

EML Payments (ASX:EML)

Matthew Kidman: Okay cards. I thought they were defunct, but no, cards are everywhere. EML Payments, they're all over the world. Buy, hold or sell?

Chris Stott (Sell): Sell, Matthew. We think this one had an okay result with a really poor outlook statement. So, the gift card space is certainly challenged at the moment and will be for the near term. So, sell.

Matthew Kidman: Gary, it bounced, but since the result, as Chris said, it's struggled. Buy, hold or sell?

Gary Rollo (Buy): For us, EML is a hold. The issue right now is people are going to think it's a retailer rather than a FinTech. Once we get through Christmas and we all understand what the earnings opportunity that EML is going to be able to deliver. As a result of that Christmas trading session, we will know more about the business and then the market will shift to its growth potential. So for us, it's a hold.

Bigtincan Holdings (ASX:BTH)

Matthew Kidman: Okay. Time to get ambitious. What's one stock you think is ambitious and taking on the world that we should know about?

Gary Rollo (Buy): Our name today is Bigtincan. We think Bigtincan is a buy. That's a small cap technology stock, software as a service. Excellent business model. It's a company that has gone global. It has a client roster that ranges from Anheuser-Busch, through Nike, up to large tech companies.

What it does is it helps companies manage their sales enablement. That's a growing area of the market. It's growing its top line at 40%. It's a $400 million market cap. It's one of these microcap stocks that are just about to get into that point where larger funds can take a look at it. So, we think the technology stacks it well and it's got a bright future.

Jumbo Interactive (ASX:JIN)

Matthew Kidman: Going to be hard to beat that, Chris, with a name like Bigtincan. You got something that's equally ambitious?

Chris Stott (Buy): We think so. So Jumbo Interactive, JIN's a ticker, so online lottery ticket reseller. Recently redone their deal with Tabcorp, really strong balance sheet. They've had a really good history of paying special dividends over time. So we think that now that Tabcorp relationship has been secured for the next 10 years, that significantly de-risks the business.

And we're really quite attracted not only by the management team but also their really strong cash flows that have generated over a very long time period. So, that one for us it's certainly come off. It's been quite weaker versus a year ago. So we think that that one certainly stands out for us.

Matthew Kidman: Some great names and some big ambitions. You might get some jumbo returns.

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