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.
These 3 stocks could be the next big movers in 2020
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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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