The reporting season may be going reasonably well but it’s really the small caps that are punching above their weight at the moment.
The attention has largely been on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) reporting season heroes like blood products group CSL Limited (ASX: CSL), our largest telco Telstra Corporation Ltd (ASX: TLS) and the ever-growing consumer financing group Afterpay Touch Group Ltd (ASX: APT).
You shouldn’t forget small caps though.
If anything the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) index is outperforming the top 200 benchmark this month with a gain of nearly 2% compared to the 1.4% increase by the larger end of the market.
If you are looking for emerging stocks to back from this profit reporting season, Morgan Stanley has three pocket rockets for you.
These three have not disappointed on the profit front and have given upbeat outlooks for the year ahead, which implies more double-digit earnings per share (EPS) growth. They have also shown strong cash flow conversion, something that small cap investors should be particularly sensitive to as smaller companies often struggle for cash.
The first is auto parts and services group Bapcor Ltd (ASX: BAP) after it posted results that were ahead of guidance.
But some investors were disappointed with the outlook with management tipping net profit growth of 9% to 14% for FY19. That was even below Morgan Stanley’s 15% prediction but the broker believes management is being conservative and will hit the top end of the range.
The broker has lifted its price target on Bapcor by $1 to $8 a share.
Travel management solutions group Corporate Travel Management Ltd (ASX: CTD) is another to watch. There were a few things that would normally give Morgan Stanley pause for thought – such as the unexpected increase in capital expenditure and softness in its US operations – but the broker is willing to over look these for three reasons.
Management provided a very strong earnings before interest, tax, depreciation and amortisation (EBITDA) guidance, its use of a conservative exchange rate of US76 cents to support its guidance and strong early revenue momentum in the US.
These were enough for Morgan Stanley to keep its “overweight” recommendation on the stock as it upped its price target to $35 a share from $31.
The third emerging stock to make the list is mapping solutions company Nearmap Ltd (ASX: NEA). The thing that got the broker excited is the acceleration in its reported annualised contract value (ACV) that is driven by improved sales productivity, good traction from its new products and lower churn.
“Add to that FY19 guidance of FCF breakeven and we see scope either to extract meaningful leverage or significantly expand the offer – geographically and functionally,” said Morgan Stanley.
The broker increased its price target on Nearmap to $2 from $1.80 per share.
There’s another emerging stock that investors should put on their watchlist as well. The experts at the Motley Fool believe this small cap star will keep outperforming the market in FY19, if not beyond.
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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO and Telstra Limited. The Motley Fool Australia owns shares of and has recommended Bapcor, Corporate Travel Management Limited, Nearmap Ltd., and Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.