Seneca's 3 underrated small caps for 2025

Note: This interview was recorded on Wednesday 20 November 2024. 

Seneca's Luke Laretive has had an objectively good year. In his first 12 months of running the firm's new small-cap strategy, he's delivered his investors a return of 28.36% (an excess return over the Small Ords benchmark of nearly 10%). 

He attributes the strategy's outperformance over the last year to investing in, simply, well-run businesses led by real entrepreneurs - particularly those companies that have been undervalued or unappreciated by the market. 

Take companies with mispriced assets, for example, or scarce commodity plays, stocks with inflecting profitability or growth companies that have been undervalued by the market. 

"I think that entrepreneurial lens gives us a unique angle when we are looking at companies, relative to someone who is a salaried, institutionalised fund manager out there," Laretive says. 

"You are actually running a business at the same time as investing in other people's businesses. So, that entrepreneurial approach does tilt how we invest, the kinds of companies we like to buy and the characteristics we like to see in management teams." 

There are 36 stocks in the portfolio right now - all of which, Laretive argues, are high-conviction ideas. "That's why they are in the portfolio," he says. 

Take Pointsbet (ASX: PBH), for example, a business with "clear takeover appeal" and inflecting profitability. This is a business that has recently been overlooked by the funds management community and labelled as a "cash burner", Laretive says. However, given its recently returned capital to shareholders and sold off its US assets, that narrative has now changed. 

Similarly, Catapult Group (ASX: CAT) has historically been considered a cash-burning business, but there is now a clear line of sight to profitability and the business has a dominant market position. Even Megaport (ASX: MP1), a company that has fallen out of favour with the market, is looking attractive. 

"This is a stock that you were once buying on 25 times EV/sales that you are now buying on five times EV/sales," Laretive says. 

In this Fund in Focus, Laretive takes investors through his outlook for small caps in 2025, how he thinks about investing, as well as a crowded small cap that he would be taking profits on. 

Timecodes 

• 0:00 - Intro 
• 0:24 - Why Seneca launched a small-cap fund 
• 0:57 - What went right over the last 12 months 
• 1:52 - What went wrong 
• 2:49 - Lessons: Don't be discouraged by the calls you get wrong 
• 3:35 - Point of difference - entrepreneurial spirit 
• 4:38 - How Seneca approaches risk management
• 5:28 - The opportunity in small-cap stocks 
• 6:09 - The factors that are important for small-cap investing 
• 7:33 - Why Seneca wants to cap FUM for its small-cap fund 
• 8:21 - Management and performance fees - a unique model 
• 9:00 - Outlook on small caps for the next 12 months 
• 10:20 - Three high-conviction ideas 
• 11:44 - A stock that has gotten too hot 
• 12:32 - How investors can access this opportunity

If you’d like to book a free, 1-on-1 consultation with Luke to discuss your specific portfolio, you can book a time in his calendar here.