Top-tipped stocks of 2020: small-caps that lead the pack

Each December Livewire asks you to nominate your #1 stock tip for the following year. Once the results are in, we track the stocks' performance using the Sharesight platform to report back on how well you fared. 

Yesterday my colleague Bella Kidman wrote about your success with the most-tipped large-caps, which were up over over 50% YTD. 

Today ... well, today I ask you to pour yourself a cup of tea, take a seat, and console yourself that some things in life, the direction of grass clippings in a hurricane, for example, or the likely performance of small-cap stocks in a plague year, are never going to be easy to predict. 

Pointsbet had a cracker. And Nanosonics did well. And even the rollercoaster that was Mesoblast splashed green. But elsewhere it was a sea of red, with six companies negative for the year, and no other tech firm – not even Appen (ASX: APX) – generating double-digits. 

Still, overall readers' small-cap stock picks underperformed the Small Ords only by a couple of percentage points, up 6.8% over the year versus around 9% for the index. Perhaps if you'd only held a few of the stocks, you might've done much better than the index. 

In the following wire, I zero in on a few of the top-performing small-caps you nominated and examine why they (and those of you who tipped them) have done so well. We'll also look at whether they're expected to continue firing into 2021. Those stocks that generated positive returns – Pointsbet, Nanosonics, Mesoblast and Appen – delivered an average return of just under 50% over the year. 

The real damage was done by the rest, which collectively returned minus-20%. As the adage goes, you can't win them all, but read on for the full breakdown of how your top-tipped small-caps performed in 2020.

And don't forget: the next survey is running again. If you participate, you'll be among the first to get the "Most-tipped for 2021" reports.

2020 performance of top-tipped small caps

Source: Sharesight, as of market close 21 December 2020

Winners' podium: top three small caps

Of all things, it was a gaming company that took the top gong among small-caps: online bookmaker Pointsbet Holdings (ASX: PBH). Its performance in 2020 was heavily underpinned by the firm’s $540 million deal with US media giant NBC Sports – a deal inked in August, around the same time PBH reported its FY20 earnings.

Teaming up with one of the biggest sports broadcasters in the US enables the firm to get its betting products into far more households within its target market, said portfolio managers Gary Rollo; Montgomery Lucent Small Cap Fund and Chris Prunty, QVG Capital Opportunities Fund in September. 

Pointsbet’s share price rose 86% to $13 when news of the deal first hit the hustings. Though it’s bobbed around since then, the stock remains only 9% below this peak at $11.80 at midday on 18 December.

Pointsbet performance YTD

 Source: ASX

In second place was Nanosonics, (ASX: NAN), a company that specialises in infection prevention and disinfection practices. Nanosonics' trophon device was launched in the US nine years ago and has developed a strong following and brand loyalty with clinicians due to its speed, safety, ease of use and relatively lower cost compared with peers' products.

Tribeca Investment Partners' Jun Bei Liu in August said the company remained a company worth holding, despite missing performance expectations for fiscal 2020. Reasons for this include its leading market share in North America, combined with high barriers to entry for new competitors in the space.

The company's share price has gained just under 30% since the end of August, despite trending downward until early November.

Nanosonics share price performance YTD

Source: ASX

Mesoblast ranks 3 and 10

It has been a rough ride for shareholders at Mesoblast (ASX: MSB), which was the third-highest performer but only snuck into 10th position on Livewire’s most-tipped stocks survey.

Mesoblast’s share price dipped some 30% in the first-quarter, before gaining more than 170% to end the second quarter at $3.25. And it’s weathered further movements since then, including a dive of 38% in August when management revealed a $78 million net loss for fiscal 2020. But this hadn't deterred Firetrail Investments' Eleanor Swanson when we spoke to her after Mesoblast's FY2020 earnings result.

PBH, NAN, MSB vs Small Ords year-to-date

Source: ASX, as of midday 21 December.

Another notable mention is artificial intelligence and machine learning tech firm Appen, which ranked fourth among your most-tipped stocks. Its share price gained a staggering 800% in the three-years to February 2020, but earlier this year Appen's share price dipped around 30% between 20 February and 20 March. Shares have since recovered and surpassed the pre-pandemic level. This is due largely to the growing uptake of AI by firms during the pandemic, with e-commerce companies a prime example. 

The company’s share price has again fallen over the last three months, down around 30% by mid-December as investors drifted away from less economically-sensitive stocks. The latest drop also follows a guidance downgrade from Appen. On 10 December, management conceded COVID disruptions had hit face-to-face sales and customer engagement, meaning fourth-quarter earnings hadn’t increased at their usual rate.

By the numbers

+6.8% – the return of your top-tipped small caps cohort for calendar 2020 so far

+147.63 % – the growth of the highest performer and second-most tipped reader stock Pointsbet Holdings

+47.59% – the average share price return of the top-4 performers YTD

-20.4% – the rest versus the best: the average return of the others
-64% – Avita Medical’s YTD share price decline, a reversal of its 700% growth of 2019

What we learnt

Eight of the 10 small-cap companies you picked last year were either healthcare or technology firms, with financial/payments and gaming the two outliers. And of the five top-performers, three were biotechnology stocks – Mesoblast, Nanosonics (ASX: NAN) and Paradigm (ASX: PAR).

But another home-grown healthcare firm, Avita Holdings (ASX: AVH), was also the biggest laggard. Its -63% return YTD is all the more surprising given its 700% growth of 2019.

Surprisingly, artificial intelligence company Appen – part of Australia’s WAAAX cohort – was the only technology stock among the top-five performers. It was also the only one to deliver a positive return, with Audinate (ASX: AD8), Nearmap (ASX: NEA) and Electro Optic Systems (ASX: EOS) all going backwards by between -2% and -15% YTD.

How other readers' picks performed

While we’ve looked at the three-top performers on the larger list, it’s also interesting to check on how some of the other top-tipped stocks fared.

Consumer discretionary-exposed gift- and prepaid-card company EML Payments (ASX: EML) ranked first in the reader survey for 2020. Having wiped off more than three-quarters of its share price during the pandemic sell-off, EML stock has risen 200% since then. From a calendar-year low point of $1.20, its shares were trading at around $4.25 at the close on Monday 21 December.

Montgomery Lucent Investment Management portfolio manager Dominic Rose is confident the company’s stock will continue to rise. Over the past few months his Small Companies Fund has been adding to its EML position – which is a top-5 holding – buoyed also by encouraging COVID vaccine news.

“5G for weapons guidance systems”

The other top-3 reader pick for 2020 was Electro Optic Systems (ASX: EOS), one of only a few defence contractors in Australia. But it was the second-worst performer of the 10 stocks across the calendar year.

EOS Made a $10 million acquisition of satellite constellation company Audacy in the middle of the pandemic – which was unfortunate timing. The deal also includes a proviso that a new satellite must launch by 2024 – meaning a capex hit down the track. And with short-term traders having moved on and the price down around nearly 30% this year – despite price volatility since March – Marcus Today's Henry Jennings  in August said it might be time to reconsider the company, having held it sporadically over the years.

Conclusion

It might seem strange that a gaming company was the top performer of your small-cap picks for 2020. But it lines up with other trends we observed during the pandemic. Gambling was (unfortunately) one of the main things Aussies splashed the cash on when they got emergency access to their super funds: one in three participants in a 2000-person survey conducted by the government’s Australian Institute of Family Studies signed up for a new online betting account during the year.

But perhaps the biggest lesson we can draw from the result is the greater fragility of performance from small-caps versus large-caps. 

Stocks in the range of around $380 million and $2 billion by their very nature are more volatile, as we saw in the performance of the reader-picked small caps this year. It proves the point made by many small-cap fund managers, that such strategies shouldn't be a core allocation of any retail investor portfolio. We're not in the business of giving financial advice but it does seem fair to say the old adage is right: diversification almost always wins out.

To see how the most-tipped large-cap stocks fared over the year, read Bella Kidman’s article here.

To be part of the most-tipped stocks list for 2021, click this link.

The Livewire Summer Series

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