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Broker picks best ASX small cap stocks to buy from the reporting season

ASX Small Caps

Last month’s reporting season turned out to be less frightful than many were expecting. But I think the ASX small caps delivered better results than those in the S&P/ASX 200 Index (Index:^AXJO).

ASX stocks at the smaller end of the market tend to be more sensitive to the domestic economy, and while things have been tough during the COVID-19 shutdown, Australia is holding up better than many comparable economies.

It’s not the FY20 profits that matter

But the issue isn’t the FY20 profit numbers. It’s what happens next as earnings from the last financial year were propped up by temporary government stimulus that will expire over the coming months.

On that front, the picture isn’t quite as rosy for small caps. UBS found that 61% of emerging companies under its coverage saw FY22 consensus earnings per share (EPS) downgrades of more than 5% in the last two months.

This compares to only 20% that enjoyed upgrades of a similar magnitude for the next financial year.

Biggest ASX small cap downgrades

There’s a long list of stocks that suffered a downgrade, including those from the popular tech sector. These include the Appen Ltd (ASX: APX) share price, Audinate Group Ltd (ASX: AD8) share price and Megaport Ltd (ASX: MP1) share price.

Stocks in other sectors also featured prominently. Some examples include the Nanosonics Ltd. (ASX: NAN) share price, Bingo Industries Ltd (ASX: BIN) share price and Pro Medicus Limited (ASX: PME) share price, just to name a few.

Best ASX small cap consensus upgrades

On the flipside, several of the ASX small cap profit season winners came from the retail sector. These include the Premier Investments Limited (ASX: PMV) share price, the record high Kogan.com Ltd (ASX: KGN) share price and Adairs Ltd (ASX: ADH) share price.  

While this group of profit heroes outperformed the S&P/ASX SMALL ORDINARIES (Index: ^AXSO) by around 22% since the start of August, not all are expected to keep beating the market over the next 12-months.

Best ASX small cap stocks to buy and sell

UBS attempted to pick the best from the winners’ circle by applying five filters. The first is valuation by looking at several metrics, such as EV/EBITDA, P/E, P/B, and dividend yield.

It also used growth (two-year EBITDA and EPS), consensus EBITDA and EPS estimate revisions for FY22, balance sheet leverage and return on capital employed.

The small cap stocks that screened the best are the G8 Education Ltd (ASX: GEM) share price, the Infomedia Limited (ASX: IFM) share price and Kogan share price.

Meanwhile, the stocks that got the lowest score are the Japara Healthcare Ltd (ASX: JHC) share price, Regis Healthcare Ltd (ASX: REG) share price and Nextdc Ltd (ASX: NXT) share price.

These 3 stocks could be the next big movers in 2020

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

Brendon Lau owns shares of AUDINATEGL FPO. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO and Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AUDINATEGL FPO, Infomedia, and Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited and Premier Investments Limited. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended AUDINATEGL FPO, Kogan.com ltd, MEGAPORT FPO, and Pro Medicus 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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