Time to Load Up On Aussie Small-Cap Stocks

Australian small-cap stocks

It’s frustrating to look at Australian equities. The ASX 200 has pretty much done nothing for the year. Only in the last few days has the index started to pick up. Our market is now up a little over 1% for the year:

Australian stock market

Source: Bloomberg

Of course, markets cannot go up forever. Yet it seems that it’s only our market that’s struggling. US stocks are up double digits. Japan’s market is up almost 10%. Even South Korea’s market is up in double digits and they’re living next to a mad man.

However, maybe I’m looking in the wrong place. Aussie stocks have risen but you cannot easily see it among the top 200 stocks.

Take a look at the graph of the Small Ordinaries below. It includes stocks within the ASX 300, but excludes those within the ASX 100:

Small Ordinaries

Source: Google Finance

The collective small-cap index hasn’t climbed double digits. But their performance is far better than their larger cousins. This is a trend which could continue according to fund manager, Allan Grey.

As reported by Morningstar:

Allan Gray chief investment officer Simon Mawhinney says the small-cap sector has long been underperforming large cap stocks but low valuations are likely to attract investors.

Despite small caps having rebounded a little from their 2015 lows, the sector “has significantly underperformed over the past 20 years and has underperformed the top 100 by 7 per cent in the 2017 financial year alone [to June 30],” says Mawhinney.

‘”We believe the significant underperformance of this sector to be temporary,” he says. “The smaller end of town is still much cheaper than the large end of town, and in particular, the small end of town is cheaper than the big banks.”

PMP Ltd Offers Opportunity

One opportunity in the small end of two, according to Mawhinney, is PMP Ltd [ASX:PMP]. PMP is a $400 million commercial print, letterbox delivery and digital pre-media company. Mawhinney said:

PMP is priced at a level significantly below that of the broader share market. On the face of it, this is a rare opportunity and it is reasonable to ask how we might be wrong.

We understand there to be three areas of concern. The first is that the projected synergies from the IPMG merger will prove elusive … The second concern is that the irrational behaviour of the print industry over the past 15 years may not be over and significant competitive tension between the now top two players may be every bit as damaging as the five large players over the recent past. And lastly, that cyclical and structural headwinds may inhibit the company’s ability to deliver its targets.

All of these concerns have merit and create an element of uncertainty but we believe this has been more than reasonably reflected in the share price.

PMP is up more than 15% this year. Could the stock, along with Aussie small-caps in general, continue to climb for 2017? Time will tell.

If you wanted to find more high growth small-cap investments, check out these top three small-caps on the ASX.

Cheers,

Härje Ronngard,

Junior Analyst, Money Morning

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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