Rapid fire with small-cap specialist Shane Fitzgerald from Monash Investors

It has been a long cold winter for investors in small-cap stocks on the ASX. The dizzy days of low interest rates and easy money seem like a distant memory when compared to the current environment.

Small caps have underperformed large caps for a sustained period as risk appetite dried up and the economic backdrop became more challenging. In this Rapid Fire session, I spoke with Shane Fitzgerald from Monash Investors about the outlook for small caps as well as some of the sectors and stocks falling on his radar.

Topics discussed

• 0:00 - Will small caps outperform large caps in FY24?
• 0:22 - Is the worst over for retailers?
• 0:46 - A commodity for the medium term and the stock Monash likes for exposure
• 1:15 - The biggest misconception about investing in small caps
• 1:25 - A tip for avoiding traps in small-cap stocks
• 1:47 - A small cap that can become a mid-cap

Edited transcript

LW: Small cap underperformance has been a feature for the past 18 months. In FY24, small caps will outperform large caps on the ASX. True or false?

SF: True. I think they will outperform. The uncertainty in the market is getting less and less by the day. Inflation is being tamed now. The interest rate cycle is probably towards the end. With that uncertainty moving out of the way, small caps have the chance to outperform again.

With rising interest rates, everyone's feeling the pain. Consumer and retail stocks have been smashed. Is the worst over or is there more pain to come?

I think in terms of the share prices, probably the worst is largely behind us. The market has already marked these companies down. It's expecting bad results. The realisation of that is not new news. Now, I think with the uncertainty in the economy improving, the outlook's probably starting to look a bit better, but it's not great.

With your medium-term hat on, if you had to pick one commodity for the next few years, what would it be and why?

It would be uranium. The one thing that we're seeing around the world at the moment is various countries reactivating their nuclear programmes. We know that for decarbonisation, we need a stop-gap measure before batteries and solar and wind farms can pick up the slack and uranium seems to be the one.

Is there a uranium stock that's got a spot in your portfolio?

Boss Energy (ASX: BOE) is probably our favourite exposure at the moment.

What's the biggest misconception about investing in small caps?

That they're high-risk. Yes, there's risk across the marketplace. But if you do your homework and keep a close eye on your companies, you can manage that risk.

Give us a tip to stay out of the potholes in small caps.

Don't believe everything you're seeing in management presentations. Management presentations are the most upbeat assessment of whatever's going on in that company. You have got to do your own work, you’ve got to look at that presentation over time and see how it changes. Basically, [take presentations with] a healthy grain of salt

I've heard the small-cap universe being referred to as the nursery. We all like things that can grow up. What's a small cap that can become a mid cap?

Probably a relatively unknown one is Impedimed (ASX: IPD). It's been around for a while and Impedimed has really got the holy grail, the NCCN standard of approval. That's the gold standard in the US for anything in terms of medicine. They've got that and since that time, all 60 private health insurers in the US have put it on their review list. Three of them have come out and approved it. In the state of Michigan, they've got 80% of people now covered for their test. This thing's about to really take off in terms of sales.

Thanks for stopping by. Good to have a chat.

Thank you.

Monash's objective is simple

Monash aim to identify businesses that 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

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