ASX small cap stocks are outrunning their larger counterparts since the bear market bottom on March 23.
The S&P/ASX Small Ordinaries (Index:^AXSO) bounced by nearly 40% since while the S&P/ASX 200 Index (Index:^AXJO) recovered by 22%.
There’s a real chance that smaller stocks can continue to outperform if we get firmer signs of the economic recovery from the COVID-19 pandemic.
That’s a big “if” but for the eternal optimists in us, there are still buying opportunities at the small end of the market even after the big run.
Here are two ASX small caps that brokers are urging investors to buy.
One that’s deeply undervalued is mining and construction engineering group NRW Holdings Limited (ASX: NWH), according to UBS.
The broker reiterated its “buy” recommendation on the stock after management’s latest trading update and guidance.
The group reported revenue of $1.6 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of $177 million for the 10 months to April.
“Annualised EBITDA and EBIT are 8% and 11% below UBSe, respectively,” said UBS.
“However, we expect this would not include claims recovery from higher COVID-19 related operating costs and we estimate profitability has historically been higher in Q4 vs Q3; both suggestive of upside risks.”
The broker’s 12-month price target on NRW is $4 a share.
Buy call retained
Another small cap that issued a trading update is Service Stream Limited (ASX:SSM). The infrastructure services group is forecasting FY20 EBITDA of around $108 million.
That’s below consensus estimates of $116 million and Macquarie Group Ltd’s (ASX: MQG) forecasts of $113.9 million.
The coronavirus fallout is impacting on group performance. The earnings miss is due to higher costs due to safety expenses, clients pausing work and the commencement of minor projects.
“With NBN activations remaining strong through 2H20, we suspect the weakness from delays are mixed and related to some reluctance on decision making from client to pursue projects and to interrupt connections in both utility and telecommunications whilst Australia works from home,” said Macquarie.
That’s good news in the sense that the headwind is transitionary. The broker also pointed out that Service Stream isn’t a beneficiary of the JobKeeper program unlike others. If the lift from the government program was excluded, Service Stream would be in a far superior position compared to peers.
Macquarie still expects Service Stream to be net cash positive by this financial year and reiterated its “outperform” recommendation on the stock with a price target of $2.88 a share.
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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Service Stream Limited. 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.