3 hot small cap ASX stocks that brokers are backing in FY20

The S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) is catching up with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and could pull ahead.

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ASX Small Caps

ASX small cap stocks have lagged their bigger brethren but there are signs that this could change as the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) index is catching up with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index in recent months.

The smaller end of the market had fallen harder during last December’s market sell-off and that means the Small Ords is only up less than 3% over the past 12 months when the top 200 benchmark has rallied 9%.

But the performance gap has been closing in 2019 and expectations that we are heading towards a zero-interest rate environment will keep market minnows on the front foot as the lowering of the risk-free threshold (which is usually the 10-year government bond yield) benefits riskier investments more.

If you are looking for stocks on the small cap index to buy, here are three hot options that leading brokers are pushing right now.

Revving back into the fast lane

The first is the Bapcor Ltd (ASX: BAP) share price which has plenty of room to run given that its fallen behind by 11% over the past year.

The automotive accessories group issued an investor update this week that struck the right chord with brokers – many of whom are recommending the stock as a buy even as the market questioned if online competition from the likes of Amazon.com, Inc. is putting Bapcor into the breakdown lane.

But Macquarie Group Ltd (ASX: MQG) is confident that Bapcor will come roaring back and that the group’s underperformance is due to cyclical and not structural issues.

The latest management update is giving the broker confidence that operating conditions are improving and Macquarie has reiterated its “outperform” call on the stock with a $6.85 price target.

Coincidentally, both Morgans and Morgan Stanley have also stuck to their “buy” equivalent rating on the stock.

Readying for take-off

Another small cap that suffered a sell-off but could be bouncing back is the Webjet Limited (ASX: WEB) share price.

The value of the online travel booking website operator plunged by around 20% since May on worries that a sluggish economy would curtail travel activity, but the sell-off isn’t justified, according to UBS.

While the soft macro outlook will weigh on the travel industry, the broker believes market share gains, benefits of its acquisition of Destinations of the World (DOTW) and structural tailwinds will push Webjet to outperform the broader market.

“Consumer sentiment is being impacted by the softer housing market in Australia (albeit rate cuts should help), continued Brexit uncertainty in the UK and economic softness in Germany,” said UBS.

“That said, we highlight that WEB has structural and market share gain benefits, together with DOTW acquisition synergies to help offset softer macro trading environments. We believe these features differentiate WEB relative to othertravel related peers and caution not to extrapolate the weakness in European travel operators directly into WEB’s B2B business.”

UBS has a “buy” recommendation on Webjet with a $20.25 per share price target.

The tech to back

Finally, most brokers are urging investors to put Integrated Research Limited (ASX: IRI) on their “buy list”.

While the business software developer has recovered strongly since the start of this calendar year, Bell Potter believes the stock will be pushed higher next week.

This is because Integrated Research is expected to issue full year profit guidance and that the market will react positive to this.

The broker has a “buy” recommendation on the stock with a $3.75 per share price target.

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Brendon Lau owns shares of Macquarie Group Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Integrated Research Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Macquarie Group Limited. The Motley Fool Australia has recommended Webjet Ltd. 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.

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