Buy Hold Sell: 5 small stocks headed for large-cap status

Brittany Isakka (SELL): I'm going to go with the other camp. I'm a sell. So I agree with Jess. It's had really impressive growth, particularly in the US, growing paid subscribers. I think their next leg of growth is coming from the UK and Australia, which are arguably much smaller markets. It still doesn't generate a profit and it's still burning cash - despite the US being such a large market. And I think even if the business does do really well, it's trading on over 10 times revenue and I just think, for me, it's a sell on valuation basis.

Temple & Webster (ASX: TPW)

Brittany Isakka (SELL): I'm sorry to be negative today, Ally, but this one is also a sell. It's had really great growth driven by COVID. Everyone stayed at home and redecorated their offices and their homes. They make a small margin, but they're trading on 250 times one year forward earnings and I think that's a massive multiple to pay for, arguably, a retailer in a highly competitive industry.

Jessica Farr-Jones (HOLD): We think that Temple & Webster is a hold. It's obviously performed exceptionally well, but again, we are a hold on valuation grounds. We think it's a great company. It's clearly a category killer in the Australian furniture and homewares market. They reported a really strong first-half result with revenue up 23% and at the top end of their EBITDA margin guidance. Revenue has accelerated to 35% in the first few weeks of this year.

Jessica Farr-Jones (BUY): We are a buy on HUB. It's done a fantastic job of taking market share away from the legacy incumbents over the past few years. This has enabled it to compound its funds under administration at over 50%, its revenue at over 30% and its earnings at around 50% as well over the past five years. We think that this is only just the beginning. They've grown their market share from 1% to 7%, but the incumbents still have 59% of the market. So we think that's a trend that will accelerate.

Brittany Isakka (HOLD): I'm a hold, Ally. I completely agree with Jess. It's done a great job taking share from the incumbents. It's got a great platform and a great management team. We like the business. However, it still operates in a competitive industry. Arguably, there are still big players who have a big share of the market and I think for us, on valuation grounds - you can tell, we are a bit more valuation-focused - it's trading on 10 times revenue, 47 times FY24 earnings. So for us, it's a hold, just on a valuation basis.

Brittany Isakka: The one I have brought for you is Breville. Most of your listeners probably know Breville. They have a coffee machine, a toaster or one of their products. What I like about this business is that the CEO, Jim Clayton, is highly innovative and I think that's hard to find in the domestic market. He's trying to create not just machines but solutions. So making customers loyal and sticky by creating products they want - whether that be a smart oven where there are different settings on how to bake a pizza or how to bake a roast chicken or whatever it might be, so that users love their products.

Jessica Farr-Jones: A small cap that we really like, which we believe can become a large cap, is a global luxury e-commerce platform called Cettire. The business is founder-led. It's managed to grow its revenue organically from $6 million in FY19 to over $700 million this year. So it's had an incredible CAGR, about 163% top-line growth over the last five years. We believe that will continue, especially as it enters new markets such as China, which is the largest luxury market in the world. It's got high profitability and high free cash cash flow. It still only trades on 27 times FY25 earnings, which is cheap relative to some other e-commerce exposures. So we think that Cettire can outperform and continue to grow - even at $700 million in revenue, it's continuing to grow at 90%.