In this episode, David Keelan from Ellerston and Andrew Peros from Ausbil analyse some of the ASX’s top small caps.
Small caps are nimble, fast-growing companies that punch well above their weight when it comes to delivering returns.
Small caps may not have the size and scale of their large-cap counterparts, but that’s exactly what makes them so exciting. These companies are often innovators or disruptors, capturing niche markets and delivering rapid growth as they expand. It’s no wonder they’ve become a favourite hunting ground for investors looking for the next great 10-bagger.
However, investing in small caps isn’t without its risks. While some go on to become the blue chips of tomorrow, others can stumble as they navigate challenges like scaling up, raising capital, or competing against larger, better-resourced rivals. That’s why picking the right small-cap stocks is critical – and that’s exactly what this episode aims to help you do today.
In this episode, we’ll delve into five ASX-listed small caps with the help of David Keelan from Ellerston Capital and Andrew Peros from Ausbil Investment Management.
From telecommunications to engineering, video game development, and even cyber safety for kids, these companies operate in sectors brimming with opportunity. Some have delivered spectacular returns over the past year – like Superloop, which has soared 215%, and Qoria, up 105%. Others, like Playside Studios, may be flying under investors’ radars.
So, are these stocks poised for further growth, or is it time to cash in? You’ll find out in this episode of Buy Hold Sell.
Note: This episode was recorded on Wednesday 20 November 2024. You can watch the video, listen to the podcast or read an edited transcript below.
Edited Transcript
Ally Selby: Hello and welcome to Livewire’s Buy Hold Sell. I’m Ally Selby and today we’re taking a look at some of the ASX’s fastest-growing small and micro-cap stocks. To do that, we’re joined by David Keelan from Ellerston and Andrew Peros from Ausbil.
David, I’m going to start with you today. We’re going to be talking about Generation Development Group, which is a pooled investment fund, which focuses on life insurance products and services. Is that one a buy, hold or sell for you?
Generation Development Group (ASX: GDG)
David Keelan (BUY): It’s still a buy for us. We’ve held GDG since it was Austock Group at 45 cents. We’ve been there for many years. It’s not quite a 10-bagger but not far off. We believe that it’s got three pillars of structural growth that will benefit over the next three to five years.
Ally Selby: It’s already done quite well over the last 12 months, its share price has lifted around 139%. It does trade on a forward PE of around 44 times. So it’s not cheap. Andrew, over to you. Is it a buy, hold or sell?
Andrew Peros (BUY): I’m going to say it’s a strong buy, Ally, even at these levels. You’ve got structural tailwinds in the investment bond business, and fund growth at 30% over the past 12 months. It’s probably going to get a kicker and accelerate when we see the tax changes in superannuation come through in the middle of next year. So that should underpin growth for many years to come. It’s almost like an annuity. And then in the Lonsec business, the real jewel in the crown is the managed accounts business. That’s growing at about 17% per annum until 2030. So again, strong growth there if they can take more share. On our numbers, it has a minimum of 20% to 30% EPS growth for the next three to five years. What’s not to like about it? I think it can double from here.
Superloop (ASX: SLC)
Ally Selby: Wow. Okay. Next up today we have Superloop, which is an independent fibre provider and telecommunications company. Andrew, is it a buy, hold or sell?Andrew Peros (BUY): Superloop’s a buy for us. I mean, what’s not to like about an NBN challenger to the lazy incumbents? Growth has been turbocharged by the Origin (ASX: ORG) contract that they’ve won. It’s got a great balance sheet and a good management team. But that said, it is on the expensive side at the moment. It’s had a great run. We’ve tripled our money on it. So right here, right now, we own both Superloop and Aussie Broadband (ASX: ABB). You’re getting the same exposure at a much cheaper multiple with Aussie Broadband. It’s founder-led. So while they’re both buys, we have a preference for Aussie.
Ally Selby: Okay. Its share price has done exceptionally well, as you mentioned. It’s up 215% over the last 12 months. I don’t know how I haven’t read about it. It is expensive, but it’s trading on a forward PE of around 34 times. David, is it a buy, hold or sell?David Keelan (BUY): It’s a buy for us. We agree. We hold both Aussie and Superloop. We prefer Superloop more over Aussie. We think management is more disciplined and strategic in their M&A. It may be on a high PE, but EBITDA is trading around 10 times for 2026. So, we think it can grow into its multiple.
Austin Engineering (ASX: ANG)
Ally Selby: Okay. Next up today we have Austin Engineering. It’s also done incredibly well over the last 12 months. It feels like all these stocks have, it’s up 96%. David, is it a buy, hold or sell?David Keelan (BUY): We’ve been a big supporter of Austin over the last few years and it’s still a buy for us. David Singleton came in three years ago and gave the company some financial discipline and some operational discipline. So, now when they’re growing, they grow profitably. We think there’s a big opportunity for them. Their product is better than the OEMs.
Ally Selby: It trades on a forward PE of around 9.45 times, so it’s a lot cheaper than the other stocks that we’ve mentioned today. Andrew, is it a buy, hold or sell?Andrew Peros (HOLD): It’s a hold for us, Ally. It’s had a great run. It did have a bit of a wobble at the August result. The profit outlook or the guidance was a little bit underwhelming, which I guess made the market question the integrity of the order book. For us, when we look at small-cap contractors, it really is feast or famine. You buy these companies when they’re trading on a single-digit multiple. You sell them when they’re at nine or ten times. So for us, a lot of it’s in the price. I think it’s on north of ten times. I think you mentioned nine and a half times or thereabouts. So for us, it’s a hold. We prefer exposure to companies that have more sustainable recurring revenue in the maintenance part of the market, like Tasmea (ASX: TEA), a name that we really like, and also Service Stream (ASX: SSM). So Austin’s a hold for us.
Playside Studios (ASX: PLY)
Ally Selby: Okay. Next up today we have Australian video game developer, Playside Studios. Hasn’t had as strong a year as the other stocks in this episode. It’s up around 5%. Is it a buy, hold or sell?Andrew Peros (HOLD): Playside’s a hold for me, at best, at the moment. It’s a name that I know well. We have made a lot of money in it in the past. Jerry and the team literally are best in class when it comes to game development, but the company really needs to mature in terms of creating a sustainable, predictable earnings profile for us to get interested in it. Again, the work-for-hire business is really stable. They’ve got some pretty big names that they’re working for. Meta (NASDAQ: META) is one of them, but it’s the original IP part of the business. You never know if a game’s going to be a hit or a miss. It’s hard to predict that. Even harder to value it. So, for now, it’s a hold, but still on the watch list.
Ally Selby: Over to you, David. David Keelan (HOLD): Yeah, we agree. It’s a hold at best. They’ve got to spend $20 million this year and we’re really unsure of what the return on that invested capital is going to be. Revenue downgrade, industry challenges, it’s a hard wait and see.
Qoria (ASX: QOR)
Ally Selby: Last up today, we have Qoria, which is a stock I’ve been hearing a lot about lately. A lot of fund managers are liking it right now. It’s the old Family Zone business focused on cyber safety for kids. Its share price is up around 105% over last year. David, last one for you today, is it a buy, hold or sell?David Keelan (BUY): It’s a buy. We’ve been here a very long time. We have a small position that is growing. Right now is the best shape of the company we’ve been in. We’re probably short tech at the medium-size end of the market at the moment. You’ve got 120 million ARR, which is huge. It’s a global business with legislative tailwinds, the balance sheet is strong, free cash flow is growing. As I said, the best shape it’s been in there a long time.
Ally Selby: Andrew, does this one pass your filters? I don’t think it’s making any money yet. Is it a buy, hold or sell?Andrew Peros (BUY): It’s a buy for us. We do see a pathway to profitability. I agree with David. It’s operating in a part of the market that people really like and are attracted to. It’s hit that free cash flow inflexion point. It is expensive, but I think it’s going to grow into that multiple really quickly. And look, Ally, if we’re sitting here in two years still talking about Qoria, I’d be very surprised. I think it’s a takeout target, so hence why it’s a buy for us.