Small-Cap Takeover: More than Just an Afterpay Story

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In today’s Money Morning…the lithium resurgence…a small-cap takeover…two very exciting small-caps leading the charge in two very exciting fields…and more…

When it comes to the ASX, I believe we’re starting to see somewhat of a takeover.

More and more small-cap companies are coming out of the woodwork and climbing the ranks. Gradually displacing and claiming their own spot in the top 200, 100, or in the case of Afterpay Ltd [ASX:APT], top 20 stocks.

Which is what every small-cap aspires to do.

Their goal is to become the mid- and large-caps of tomorrow, companies that will define the next era of Australian industry and investment.

Again, Afterpay has clearly stolen a lot of the spotlight on this front, a success story that has been much faster than I’m sure many expected.

Hell, even now some critics still don’t believe in the company.

The bigger story, though, in my view, is that Afterpay proves that the All Ords may be readying itself for a bigger shakeup. And no, that doesn’t mean the big banks and miners are going to go away anytime soon.

But don’t be surprised if they start facing some stiffer competition…

The lithium resurgence

One of the other big stories of the past year and a half is of course lithium miners.

The sector has gone nuts with expectations and hype around a global EV boom once more. Fuelled by the shortages hitting the automotive industry and growing demand for sustainable options.

As a result, Pilbara Minerals Ltd [ASX:PLS] and the upcoming merged business of Orocobre Ltd [ASX:ORE] and Galaxy Resources Ltd [ASX:GXY] have broken into the ASX top 100. Cementing their position as stalwarts of this revived sector.

Which is hardly surprising given the extreme run-up these stocks have enjoyed.

This time last year Pilbara was trading for just 33 cents a share, for instance. On Wednesday it peaked at $2.45.

A 621% gain in 12 months!

Not bad for a company that wasn’t even earnings positive in FY20. A huge turnaround and estimated EBITDA of $36.7 million for FY21.

More importantly, though, it is the future outlook that has really cemented the lithium story. With analysts forecasting a 176% and 263% increase in sales for FY22 and FY23.

Suggesting that the real boom is still yet to come. And investors are certainly paying a premium for that expectation.

As Argonaut Funds Chief Investment Officer David Franklyn told the AFR:

The US, EU and China are all strongly pushing the shift to electric vehicles, whilst renewable energy production continues to build market share. Investors are now actively looking to build exposure to what will be a major driver of the resource sector over the next decade.

A theme, and a narrative, that has helped push these two miners — and others — to new heights.

Which begs the question, what other trends will the small-cap sector dish up in the near future?

A small-cap takeover

Well, fortunately, as someone who pays close attention to Aussie small-caps, I can tell you there is a lot to look forward to.

The sheer amount of diversity and innovation coming from the tail end of the market is fantastic. Showcasing a lot of potential for some emerging names to carve out their own niche.

For instance, in the tech space it used to be all about the WAAAX stocks: Wisetech, Afterpay, Altium, Appen, and Xero. And all of these businesses are still around and kicking.

But from the smaller side of things, I can foresee some emerging giants.

BrainChip Holdings Ltd [ASX:BRN] and Archer Materials Ltd [ASX:AXE] are two prominent and exciting examples. Both of which are trying to become leading players in the neuromorphic computing and quantum computing sectors, respectively.

Two very exciting small-caps leading the charge in two very exciting fields.

Just one example of a slew of potential from relatively tiny businesses.

And don’t get me wrong, not all of these small-caps will succeed. This is the speculative part of the market, after all. Even BrainChip and Archer have a long way to go to really prove themselves.

But with the way the markets have been shifting, I expect we’ll see a lot of change in the months and years to come. In fact, I won’t be surprised if, in a couple of years, the top 100 and maybe even the top 50 stocks on the ASX look very different to today.

Things are moving fast, and small-caps are helping lead new change.

So stay tuned to Money Morning. Because next week we’re going to explore some of the opportunities these tiny stocks have to offer. Talking about not only small-cap investing in general, but also some of the biggest trends driving volatility amongst them, right now.

Until then…


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.

About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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