With the S&P/ASX 200 Index (ASX: XJO) still hovering at record highs this results season, investors may have to turn to lesser-known businesses for a bargain on the way up.
Fairmont Equities managing director Michael Gable told his clients that he has an optimistic outlook for Australian shares.
"In the last few days, we have once again seen the US markets come back to the 50-day moving average and bounce off it, which means that the uptrend remains in place for now," he said.
But Fairmont reported 2 specific smaller-cap ASX shares that it is especially positive on:
Can Genworth deal with a potential break-up of a 50-year relationship?
Genworth Mortgage Insurance Australia Ltd (ASX: GMA) is in the business of providing lenders' mortgage insurance for home loans.
This ASX share holds a field-leading 31% share of the market, according to Fairmont's The Dynamic Investor report.
Its results this month exceeded expectations.
"Underlying net profit after tax (NPAT) for the six months to 30 June 2021 (1H21) was ahead of market expectations and underpinned by better-than-expected underwriting profit, which was driven by lower net claims incurred (-51%)."
One current risk spooking potential investors is that its contract with Commonwealth Bank of Australia (ASX: CBA) is up for renewal.
While Genworth has enjoyed a 50-year relationship with the banking giant, there is no absolute guarantee that would continue.
The stock dropped from around $2.80 in mid-June to $2.26 on Tuesday afternoon.
Gable's team reckons the current price is worth it even if the CBA deal is lost.
"At current levels, the market appears to be heavily discounting the shares relative to its adjusted NTA [net tangible assets] should the CBA contract be lost, with the price/NTA ratio well below the usual range," the Fairmont report read.
"On an 'as is' basis, the fundamentals are improving. In particular, GMA's improving profitability, strong reserving (which was increased in 1H21) and strong capital position leaves it well-positioned to deliver strong shareholder returns."
Genworth shares typically trade between 20% to 40% discount to NTA, according to Fairmont.
"Short interest in GMA has been declining materially since January 2020 and now sits at [approximately] 1%."
Can Imdex join the big boys?
Imdex Limited (ASX: IMD) is a technology and equipment provider for the mining industry.
"The company has a strong market presence on 70% of mineral drilling projects globally and generated sales in over 100 countries," reported Fairmont.
"Imdex directly supports 18 of the top 50 mining companies globally and has long-standing relationships with most of the top drilling clients."
The company's financial results this month showed earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin shot up to 28.5%.
Imdex declined to provide future guidance. However, Gable's team suspects financial year 2022 "appears likely to be another year of strong growth".
Imdex shares are up more than 34% for the year. However, they have dipped from $2.49 earlier this month to $2.30 as of Tuesday afternoon.
"The shares are currently trading on a 1-year forward P/E multiple of [approximately] 23x, which we do not consider to be demanding in the context of earnings per share growth of 15% over FY21-24 on a CAGR [compound annual growth rate] basis."
But for those buying in now, the biggest uplift could come from a trigger that is completely unrelated to anything Imdex itself does.
"Inclusion in the S&P/ASX 200 Index is a potential catalyst for the shares."
The business has a market capitalisation of around $900 million. The smallest company in the ASX 200 is Perseus Mining Limited (ASX: PRU), with a market cap of $1.89 billion.
