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

In this episode, our guests analyse the growth potential of Life360, Temple & Webster and HUB24. Plus, they each name a big "buy".
Buy Hold Sell

Livewire Markets

If rates have peaked, which local cash rate futures indicate they have, long-duration growth names, small-cap stocks, and cyclicals are likely to continue to recover from here. 

That said, there are some risks to that outlook - particularly given it's the market consensus. So in this episode, we'll be putting some of the ASX's up-and-coming small-cap growth and cyclical stocks to the test. 

These small-cap stocks have had a stellar year, having risen an average of 117%. So can they do it again over the coming 12 months? 

To find out, Livewire's Ally Selby was joined by Regal Funds Management's Jessica Farr-Jones and Spheria Asset Management's Brittany Isakka for their analysis of Life360 (ASX: 360), Temple & Webster (ASX: TPW) and HUB24 (ASX: HUB). 

Plus, our guests each name a small-cap stock that they believe could be headed for large-cap status over the years to come. 

Note: This episode was recorded on Wednesday 28 February 2024. You can watch the video, listen to the podcast, or read an edited transcript below. 

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Edited Transcript 

Ally Selby: Hey, how are you doing? And welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today we're taking a look at five small stocks with big growth plans on the horizon. These stocks have had a stellar 12 months, so to find out if they can do it again, we're joined by Jess Farr-Jones from Regal, and Brittany Isakka from Spheria. Thank you so much for joining us today. Excited to feature you both on Buy Hold Sell.

First up, we have Life360, which has seen its share price rise around 56% over the past 12 months. Jess, I'm going to start with you. Is it a buy, hold or sell?

Life360 (ASX: 360)

Jessica Farr-Jones (BUY): We think Life360 is still a strong buy and Regal is a substantial shareholder. We love investing in founder-led global market leaders and that's what we believe Life360 is. They rank in the top 20 most-used apps in the US, yet they only have about a US$1 billion market cap and they're alongside the likes of Google and Facebook. They're also used by parents 15 times a day, so they're not discretionary at all.

They were able to put through a 50% price rise recently and saw very minimal churn, which again, alludes to the non-discretionary nature of the app. We believe that revenue and earnings can compound materially over the next few years and there's a material international expansion story that will play out as well.

Ally Selby: Analysts expect its earnings per share will grow by 101% over the coming 12 months. Over to you, Brittany. Is it a buy, hold or sell?

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)

Ally Selby: Okay, next up today we have Temple & Webster. This one completely shocked me when I looked up its 12-month share price performance. It's up 263%. Staying with you, Brittany, is it a buy, hold or sell?

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.

I think there's better value in small caps and one name would be Universal Store Holdings (ASX: UNI). It is rolling out stores, it has a great management team and a net cash balance sheet. So I prefer to play retail in another space. Another thing is their Chairman and their CEO have sold stock this month, which I think is always an indication that a stock is fully valued. So I'm a sell.

Ally Selby: Always a red flag. Okay, analysts believe its earnings per share is set to drop by around 30% over the coming 12 months. Over to you, Jess. Is it a buy, hold or sell?

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.

But as Brit alluded to, it's trading on 80 times two-year forward FY25 earnings. And we think there are other e-commerce names, whether it's Kogan (ASX: KGN) or Cettire (ASX: CTT), that are trading on a fraction of that multiple. So we think it's a great business that will continue to compound revenue and earnings at a high rate, but we'd prefer to get exposure at a cheaper share price.


Ally Selby: Next up today, we have HUB24. Its share price has risen around 32% over the past year. Jess, staying with you, is it a buy, hold or sell?

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.

They have a fantastic platform. It was recently rated the number one platform in the market and they have the highest share of net flows in the whole industry over the last year as well. So we think it's a great product, a great management team, and it's on about 21 times FY25 earnings. So we think that that's a reasonable multiple to pay for a structural growth story.

Ally Selby: Okay. Analysts believe its earnings per share will grow by 67% over the next 12 months. Over to you, Brittany. Is it a buy, hold or sell?

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.

Ally Selby: Okay, we asked our guests to bring along one small or micro-cap that could be headed for large-cap territory. Brittany, what have you brought for us today?

Breville Group (ASX: BRG

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.

They've had some headwinds, and are comping strong growth coming out of COVID. But I think that's a short-term headwind and I think long-term, the business is growing by entering new markets and with new product innovation. So we really like Breville.

Ally Selby: Okay, over to you Jess, your time in the hot seat. Which small or micro-cap stock do you believe could be headed for large-cap territory in the coming years?

Cettire (ASX: CTT)

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%.

Ally Selby: Well, there was some awesome analysis in that episode today. I hope you enjoyed it as much as I did, and of course, I hope you enjoyed those stock picks. If you did, why not give this episode a like? And remember to subscribe to our YouTube channel. We're adding so much great content just like this every single week.

Which small stock do you think could be headed for large-cap status? 

Let us know in the comments section below. 

Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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