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Top investor Chris Prunty sees big opportunity in ASX small caps

Sydney’s Chris Prunty was recently named one of the top 14 buy-side analysts in the world by SumZero (a website commonly known as the ‘Facebook for hedge funders’).

Alongside mate and fund manager Tony Waters, Prunty analyses stocks for Ausbil Dexia’s $100 million MicroCap fund, which has posted impressive returns to date — over 30% per annum since inception in 2010 — handily outperforming its benchmark, the S&P/ASX Emerging Companies Accumulation Index.

Simply read on to discover where Prunty sees opportunities for investors today. Present market conditions are especially ripe and promising, he says: “The last thing I’d go and do right now is buy the market, or index. It’s a good environment for stock pickers.”

It’s music to our Foolish ears…

A lifelong interest

Prunty’s interest in investing began early. “My father had owned some shares and the idea that you could make money from picking the right ones appealed to me,” he says.  “The problem was no one could tell me which were the right ones, so I went looking for a book that would teach me. I ended up reading The Warren Buffett Way by Robert Hagstrom in the first year of uni and was hooked.”

Today, Prunty is married with two young sons. He loves cricket and Aussie rules football (his team is the Essendon Bombers). Yet his focus on stocks is nearly all-consuming: “Successful fund managers live, breathe, eat, and sleep stocks,” as he puts it.

“I often describe my job as part detective, part accountant and part journalist.  You need to find out things that other people don’t know, understand the numbers and narrative — hence the skills of a detective, accountant and journalist are all relevant.”

Four promising small cap ideas

Small cap stocks represent the best opportunities in the ASX, says Prunty, because: “There’s more chance of finding an undiscovered gem in the small cap space. Large caps in Australia are a very concentrated and highly picked-over market.”

“I tend to focus on industrials,” he says. Overall, “We like good businesses getting better or special situations where companies have undergone some sort of change that the market has yet to recognise… It could be a management change, a change in the balance sheet or the business model. All of these changes can create or destroy value, and in the small cap space, the market can be slow to price these changes.”

For instance, Prunty says, “We’ve held Credit Corp (ASX: CCP) since inception… It’s a stock where the story just keeps getting better.”

Amcom Telecommunications (ASX: AMM), Ainsworth Game Technology (ASX: AGI) and MACA Limited (ASX: MLD) are all stocks we’ve held for a while. However, everything is for sale every day!”

In terms of holding periods, “We tend to practice serial monogamy,” he says. “We go in to our marriages with the intent that it’s forever… but if they’re unfaithful we have no hesitation in filing for divorce.”

Prunty’s preferred small cap energy stock

“Mining services and resources are as cheap as they’ve ever been,” Prunty points out. And yet, “I’d be extremely cautious on mining services. Most of them are value traps. We like MACA because it has contracted revenue which gives it some visibility.”

Sundance Energy (ASX: SEA) is my preferred small energy stock because it has a great balance sheet and very good management,” he says.

Attention investors: Excited about small caps? Learn about two more of the ASX’s most promising small cap companies in The Motley Fool’s special free investment report. Click here now, your copy is FREE!

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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