How Monash Investors finds Aussie small-caps with 60% upside (plus 3 that pass the test)

The figure in the headline above seems oddly specific. But it's a number that has emerged in Monash’s decade-plus history of finding opportunities in the team's sweet spot of Aussie small-cap companies. 

It’s a shorthand Shane Fitzgerald and Monash Investors have adopted for finding investment prospects with significant earnings growth ahead of them.

"60% is a somewhat arbitrary number but it’s one we’ve found, in our 12 years, that works best for us," Fitzgerald says.

Just how appealing are ASX small caps now? They've underperformed large caps by about 22% since the end of 2021. And that’s now turning around.

As Fitzgerald explains, the opportunity revolves around the big macro moves we’ve seen in the last 18 months. These have contracted everyone’s time horizons, a corollary of the reversal of the trend we saw pre-2020 when big volumes of money shifted towards the smaller end of the market.

And on the inflation front, Fitzgerald says he now doesn’t hear many companies talking about supply chains.

“What was the biggest cause of this higher inflation? Supply chain surge. That’s mitigating now, which means we’re probably at the tail end of interest rate rises,” he says.

“All the uncertainty about the economy is starting to dissipate. We’re now moving much more into a stock picker’s market.”

Fitzgerald also discusses “the good, bad and ugly” of Australian equity sectors, singling out the retail space as one that is likely to be a big theme in the upcoming FY23 earnings season.

“The key is, will it be as bad as the market expects…because expectations are at rock bottom,” he says.

In the following conversation, Fitzgerald discusses the outlook for small caps and “repeatable process” his team employs to consistently find superior Aussie small caps. He also shares three examples of companies that meet Monash's 60% upside hurdle.

Talking points

• 00:40 - How the current environment is impacting small cap stocks
• 2:00 -  Small cap underperformance versus large caps
• 3:30 - The Monash process for finding stocks with 60% upside
• 4:00 - How Monash finds companies that tick its boxes
• 4:30 - Finding gems in the small cap index
• 7:50 -  The good, bad and ugly of ASX equity sectors
• 9:00 - Three stocks Monash believe have 60% upside

Monash's objective is simple

Monash aim to identity businesses which are likely to undergo step-changes in their business prospects which will lead to oversized share price movements. They draw upon their experience in order to exploit recurring business situations and patterns of behaviour, to identify and invest in a portfolio of compelling opportunities

Managed Fund

Monash Investors Small Companies Fund

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ETF

Monash Investors Small Companies Trust (Hedge Fund) (MAAT)

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