Chris Stott’s 5 high conviction stocks for the new bull market

Time flies when you’re having fun! While the last five years have had plenty of ups and downs, they haven’t dented the enthusiasm and passion of small-cap fund manager Chris Stott from 1851 Capital.

Stott launched 1851 Capital in 2020, just before COVID-19 hit, wreaking havoc on the market and his portfolio. Since then, Stott has comfortably beaten his small-cap benchmark, growing the fund’s initial capital of $80 million to almost $500 million through a combination of inflows and capital growth.

Whilst there was some exuberance after the initial shock of the pandemic, the past few years have been far more challenging for small-caps investors.

“Over the past four and half years, the small-cap index has returned 3% per annum. If you look at the 30 years before we launched the fund, it was 10% per annum. So quite a significant underperformance, quite dismal in fact,” Stott says. 

However, late October 2023 marked a turning point and the small-cap index has recently entered a technical bull market, having rallied more than 20%. 

So where to from here and which companies does Stott believe can sustain the early track record that 1851 Capital has established?

In this episode of The Rules of Investing, Stott shares his lessons from starting a new fund, why he believes the bull run in small caps can continue and five of the stocks he is backing to deliver market-beating returns.

For those of you with a good memory, Stott was last on the podcast in June 2020, when he tipped NextDC (ASX: NXT) as the one stock he would hold if markets were to close for the next five years. Shares in NextDC have gained more than 75% over that time, and the company is now in the ASX100, forcing Stott to exit his position. Naturally, we’ve asked him for a fresh idea.

You can access the full discussion by watching or listening to the player below. A written summary covering some of the key topics is available here. 

Note: This episode was recorded on Wednesday 8 May 2024. 

Time codes

• 0:00 - Introduction
• 2:02 - From the Vault: Chris Stott features on Livewire’s first episode of Buy Hold Sell
• 3:31 - Reflecting on the first four years of 1851 Capital
• 6:57 - Key ingredients for sustained outperformance
• 11:30 - Stories from a few difficult years for small cap investors
• 17:46 - Why 1851 Capital doesn’t invest in the resource sector
• 20:55 - The big picture outlook and why Chris Stott remains bullish
• 23:26 - Key positions for 1851 Capital
• 27:27 - Earnings outlooks and key points from the Macquarie Conference
• 30:55 - A small cap turnaround story that is finally getting it right
• 33:04 - Avoiding small cap traps
• 36:41 - A painful loss and the lesson from it
• 39:19 - What investors are overlooking today
• 42:19 - A stock for the next 5 years if markets were to close

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