Could these 2 stocks become the ASX's next 10-baggers?

Andrew Peros: I'll start by saying a few others that have been notable 10-baggers. HUB24 (ASX: HUB), Life360 (ASX: 360), and Pro Medicus (ASX: PME) - all very well-known names in the small and micro caps space that have graduated to become successful small and mid-caps. I would say the most common theme that I've noticed is that they're pioneers or disruptors in their field of business. Afterpay, for example, was a real pioneer in that buy now, pay later space, REA Group took advertising into the digital realm, and then Life360 really in that family safety and family tracking part of the market. It's a new category and they've been quite successful on that front. A lot of them are founder-led, a key theme in smaller micro-cap space, have scalable business models using existing technology and scale it out into the global market.

David Keelan: No. First of all, if there's going to be a lousy Total Addressable Market (TAM) or if there's not a lot of TAM, there's no point. Generally, they have a twist on the traditional model, so therefore, they're easy to accept. So, they are not fully disrupting, but have a different edge on what's out there already and a strong call to action.

How to identify long-term compounders

Ally Selby: What's the secret to identifying long-term compounders then? Are there any factors that you think are really important?

Andrew Peros: Well, I certainly agree with David. Founder-led businesses have a history of delivering through time. We have approximately 40% of our portfolio in founder-led businesses. So, we really do back the man. But one thing that we do at Ausbil is we screen out the unprofitable and illiquid names first. They are the concept stocks, the stocks where you can't really assess future earnings. There's perhaps no prospect of profitability. So, once we screen those out, we look for companies that are on that journey to profitability and hopefully capture them early in their life cycle.

Andrew Peros: Absolutely not.

Andrew Peros: It was well flagged. Chris Hulls is a very energised and motivated founder. He still has plenty of skin in the game. We did get notice of a potential sell-down coming 12 months ago, so it shouldn't come as a surprise to investors. But for what it's worth, the volatility in the share price we have seen as a buying opportunity. So, it's been great for us.

David Keelan: I agree with Andrew. Insider selling - follow the smart money instead of dumb money. Ellerston is an active manager. We like to travel for a third of the year. We love speaking to management and industry contacts. We're looking for a change in narrative. When things change and we can't articulate why, that's a red flag to us.

Should you invest in company's without profits? 

David Keelan: We invest in companies that will have negative free cash flow. Our view is that at this end of the market, it's part of our job. We spend a lot of time with these companies trying to understand their unit economics. We look to offshore peers to see how they're articulated. Aussie companies are a bit more immature in how they present sometimes. So we'll spend time with management, spend time with the CFO, and really try and understand what return they're going to get back on their investor capital.

Andrew Peros: We're not punitive when thinking about profitless companies. We do make exceptions. I mean, how else would we have invested in Afterpay and Life360 in the early part of their journey? But generally, we want to see that path to profitability within a 12-month period. As a minimum, we want to see cash flow break-even just so we know that they're self-funding and they can fund their growth sustainably. So that's a way for us to de-risk the proposition.

David Keelan: So, I'm going to name one that's just downgraded. We've got a small position in Veem. We think Veem has the potential to be the next PWR (ASX: PWH). Veem's core business makes gyros, which stabilise ships and boats, and they're growing into propellers, shaft lines, and defence. The market got really ahead of itself over the last 12 months, with stock trading at $2. It is now around $1.20. It will drift for a while while the market re-calibrates its expectations, but we think over the next three to five years, it's got amazing upside.

Andrew Peros: Today, I'm going to name a company called Catapult, ticker is CAT, which operates in the world of sports analytics and data aggregation. Now, the starting point from my perspective with CAT is sport is a very big business. Some of the largest sporting teams in the world are worth tens of billions of dollars. There are hundreds of billions of dollars spent on advertising, TV rights, and affiliate programs. So there's a huge share of wallet that these sports teams are targeting. Now, the opportunity for CAT is to leverage their products, become part of the fabric for these elite sports teams, so it can give them the edge when it comes to competition and winning competitions.