Small-cap ASX shares have treated investors very well in the past year.
Yes, the big boys of the S&P/ASX 200 Index (ASX: XJO) gained more than 23% over the last 12 months. But the little guys have actually outperformed them, with the S&P/ASX Small Ordinaries (ASX: XSO) returning almost 26%.
Eley Griffiths Group managing director Ben Griffiths reckons small-cap ASX shares are in “the midst of a bull-drive”.
“Reassuring to see 66% of small cap names are trading above their 100-day moving average,” he posted on Livewire.
“Witness the solid outperformance small caps have had over large caps this past 12 months.”
Griffiths’ team is “confidently” betting that the Small Ordinaries will hit 4,177, which is a 23% premium to now.
And he picked out 5 small-cap ASX shares that might lead the charge.
Real estate and finance
Griffiths’ team likes Pepper Money Ltd (ASX: PPM) because they see it as “more entrepreneurial and opportunistic than other operators” in the lending sector.
“For example, in the mortgage broking channel, where customer service and approval times are critical, Pepper’s investment in technology, particularly in its distribution capability, has positioned it well for further market share gains.”
The company listed on the ASX in late May after an initial public offer priced at $2.89 per share. The stock closed Tuesday at $2.40.
“The company was priced on a [price-to-earnings ratio] P/E of 10.5x,” said Griffiths.
“Whilst its debut has been soft, we are optimistic about the company’s future, particularly as credit growth in Australia continues to recover post The Royal Commission.”
Related to this is another recent ASX debutant, PEXA Group Ltd (ASX: PXA).
The real estate transaction settlements system holds a practical monopoly in Australia currently.
“As various state governments have embraced [or] mandated digitisation over the last few years, electronic settlement now makes up over 70% of all transactions, of which Pexa has a circa 95% share.”
While wary of IPOs, Griffiths’ team managed to follow Pexa’s fortunes since 2018 via 42%-owner Link Administration Holdings Ltd (ASX: LNK).
“The business has excelled over that time frame, growing from ~$40 million revenue then to in excess of $200 million today.”
Gamblers going from TAB to this ASX share
Bluebet Holdings Ltd (ASX: BBT) is taking advantage of the recent trend away from traditional provider TAB to online bookmakers.
“Bluebet has been well-positioned to pick up market share, particularly from regional customers looking for alternative wagering product[s] with a quality mobile and in-app experience,” said Griffiths.
“Mobile-first with innovative wagering products, Bluebet has grown to over 90,000 registered customers, with significant growth in betting turnover (>$340mil).”
And of course, like every other online Australian bookmaker, it’s having a go at the recently deregulated US market.
‘Significant scale’ for this small cap
Chemicals company DGL Group Ltd (ASX: DGL) also listed on the ASX in late May after raising $100 million through the IPO.
It’s no startup though — it floated with a 20-year history behind it.
“Specialist licenses and significant scale positions DGL as the leader in chemical manufacturing and logistics across the Tasman, with the top 20 customers having on average over 9 years of tenure,” said Griffiths.
“With sound financials, management alignment and large end markets, DGL is a quality industrial addition to the portfolio.”
DGL shares are up almost 39% since its listing.
This small-cap ASX share is ‘over-trading’
Agricultural services provider Elders Ltd (ASX: ELD) was sold off after a “strong interim result” in May, according to Griffiths.
“We believe Elders is presently ‘over-trading’, notwithstanding a continuing flow of self-help initiatives via acquisition integrations and 8-point plan wins,” he said.
“The group is well leveraged to livestock prices and is presently booking outsized earnings largely from record cattle prices (via voracious re-stocker demand).”
Despite the sell-off the last few weeks, Elders shares are still up more than 15% for the year.