Buy Hold Sell: 6 small caps on the rise

The wild world of small caps has enamoured investors and punters alike since the dawn of time. Case in point, if a friend asked you to name your best stock pick, I'm almost certain they don't want to hear about BHP - they are after a small-cap. 

These companies excite investors because their size means that they can grow multiples faster than their big cap cousins, and the lack of media coverage makes sorting through the company reports and Livewire articles all the more worth it when you find that gem. So to ease up your search, we brought in the experts. 

In this episode of Buy Hold Sell, Ally Selby is joined by Nathan Hughes from Perpetual and Mike Murray from Australian Ethical. The trio discuss four small caps on the rise, including Integral Diagnostics, Nitro Software, PEXA and Blackmores.

And to top it all off, our fundies have each brought along one small-cap with big potential.

Note: This episode was filmed on Wednesday 15th September 2021. You can watch or read an edited transcript below.

Edited Transcript 

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm your host, Ally Selby. And today we'll be looking at four small-cap companies with big ambitions. And to do that, I'm joined by Nathan Hughes from Perpetual and Mike Murray from Australian Ethical. Plus we've asked our fundies to bring along one company that they believe has exponential growth potential over the years to come.

Integral Diagnostics (ASX: IDX)

Ally Selby: First up, we have Integral Diagnostics, a leading provider of medical imaging services in Australia and New Zealand. It's made two major acquisitions recently. Nathan, I'll start on you, is it a buy, hold or sell?

Nathan Hughes (HOLD): I think Integral Diagnostics is a hold at this point. It's a sound business. It's suffering at the moment from renewed lockdown volume concerns. But what we saw earlier in the year is that once people are out and about, volumes will bounce back pretty quickly. I think the stock is reasonably valued, it has a sensible balance sheet, I think it's a hold.

Ally Selby: Mike, its share price cascaded around 17% after it reported on August 27. Should investors use this as an opportunity to buy the dip? Is it a buy, hold or sell?

Mike Murray (HOLD): I'm going to go with a hold as well. We really like this industry and the company's done a good job of improving its margins, but I wonder where it has to go from here. In stock price terms, it trades on about 25 times. I think it's probably reasonably fully geared for what it is, so I just think we can find better opportunities at the moment.

Nitro Software (ASX: NTO)

Ally Selby: Next up we have Nitro Software, a business born in Melbourne in 2005. Flash forward 16 years, and it has 2.8 million users in over 155 countries. Mike, I'll stay with you. Is it a buy, hold or sell?

Mike Murray (BUY): I'm going to go with a buy on this one, Ally. We actually hold this in our active portfolios. We're excited about the opportunity for this company. It meets a couple of things that we look for: it has a global market for its product, and it's a very big market, it has a recurring subscription-based revenue model, and the pricing of its product is quite attractive. So it's coming in under the pricing of Adobe, which really owns that market, so it's a buy for us.

Ally Selby: Nathan, over to you. It hasn't been able to turn a profit yet. Is it a buy, hold or sell?

Nathan Hughes (SELL): I'm going to disagree with Mike and say it's a sell, but that is really driven by valuation. I think it's a really interesting product, and as Mike said, it has a really massive market opportunity in front of it. They are delivering strong revenue growth and a lot of that is recurring, but we're not seeing any of that translate into profitability and continued losses are forecast, so from our standpoint, it's a sell.

PEXA (ASX: PXA) 

Ally Selby: Next up we have PEXA, which was listed on the ASX on July 1st this year. Nathan, I'll stay on you, is it a buy, hold or sell?

Nathan Hughes (SELL): Again it's a sell Ally, but really that is valuation driven. I mean, PEXA is a really unique business. So they're dominant in the Australian market. They've solved a problem for the industry and we think their competitive position here is relatively assured. I don't think that competition, whilst it's there, I don't think it's going to impact them because of their first-mover advantage and the links that they've built with industry participants, be it conveyances or banks and the like. There are some concerns that pricing might be kept under check here, domestically. And also, I think in today's valuation, you are assuming success offshore, which comes with execution risk, time and considerable investment.

Ally Selby: Mike, its share price has plummeted around 6% since it listed. Is it a buy, hold or sell?

Mike Murray (BUY): I don't disagree with Nathan's comments about the business, except we have a different view on the opportunity. I'm going to call it a buy. We own the stock. And really it comes back to the fact that stocks like this rarely look attractive on near term earnings. We're believers in the long-term opportunity here. And I think the experience with these kinds of platform-style businesses has been, they tend to grow for longer periods of time at higher rates than might be apparent when they first list, so we like this one.

Blackmores (ASX: BKL) 

Ally Selby: Last, but not least, we have Blackmores. Its share price soared off the back of its recent results. Mike, staying on you, is it a buy, hold or sell?

Mike Murray (BUY): It's a buy for us. It's another stock we've owned for a while. The thing that really attracts us to Blackmores is it is one of those companies that has a global opportunity for its product. It's got a strong brand proposition, which we think allows it to generate a good margin and probably a growing margin through time, and there is corporate interest in this style of assets. So trades on a reasonably high PE, but we think it's still an attractive opportunity.

Ally Selby: Nathan, as Mike mentioned, it's really betting on global growth in FY22, particularly in China and India, is it a buy, hold or sell for you?

Nathan Hughes (HOLD): So it is a hold and probably pre the price spike of late, a buy. It's something we were interested in. But at these levels, it's a hold. It's got all the right foundations. There's a strong balance sheet. They've got really strong brands. As Mike touched on, there is scope for considerable growth. They've put some pretty lofty targets out for FY24. But everything seems to be moving in the right direction. We think the new CEO is putting some good plans in place, so it's a hold for us. 

Two small caps with plenty of potential

Ally Selby: Okay Nathan, we asked you to bring along a stock with plenty of potential today. What have you brought for us?

Beacon Lighting (ASX: BLX)

Nathan Hughes (BUY): I brought a little company called Beacon Lighting. It's a retail company. There is no doubt that they've benefitted over the last 18 months from changing consumer spending patterns. There's no doubt at all about that, but I think there's a long runway for growth here and that will come from a few different things. So there's continued rollout of their existing store network. There's direct to consumer online, so they're going to new markets globally, which is really in its infancy. And they're also using their existing relationships here in the existing store network to penetrate into the trade channel. So using their relationships with big builders, volume builders and trying to move down the trade path away from a purely retail path. And the company thinks that could be as big as the retail sales in the next five or so years. So I think that's a really big opportunity. The company has grown revenues at about 10% per annum compound since listing, and we think there's a long runway for growth ahead, so my stock's Beacon Lighting.

Ally Selby: Okay, awesome. Mike, over to you, your time in the hot seat. Can you beat Beacon Lighting? What have you brought for us today?

CogState (ASX: CGS)

Mike Murray (BUY): I've brought you something that's quite different to Beacon Lighting. And it's not something I'm recommending as a buy necessarily at the moment, because it has had a very good run, but we do hold the stock. It's a company called CogState. Now CogState has come onto the radar recently because it provides testing for cognition. Really where that testing is used is in clinical trials often to do with Alzheimer's disease.

The really game-changing event is that there was a new drug that's been approved in the US for Alzheimer's and that stimulated a whole lot of new clinical trial work within Alzheimer's. So we're seeing a very good rate of revenue growth in their core clinical trials business. The other thing they've done is they've licenced this technology as almost like a direct to consumer test, globally. And if you think that you might go to the doctor in the future and not just get your blood pressure tested, you might get your cognition tested for early signs of dementia or cognitive decline. And so that's a company that I think, over a decade, has got a very exciting growth path.

Ally Selby: Well, there were plenty of exciting small caps in there for you today. We hope you enjoyed that episode, if you did, remember to give it a like. And subscribe to our YouTube channel. We're adding new content every week.

What small-cap are you backing? 

Let us know what small and mid-caps you believe have exponential growth potential in the comments section below. 

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