Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Capital H Management founder and chief executive Harley Grosser reveals two small-cap ASX shares that are in the buy zone, and the ones that he missed that still haunt him.
Hottest ASX shares
The Motley Fool: What are the two best stock buys right now?
Harley Grosser: The first one is one that I think readers may have seen me mention before, but it's just gotten to such attractive valuation levels that I think it's a near-term buy — that's Webcentral Ltd (ASX: WCG).
This is the telco, cloud services and domain management business. They've given $30 million of EBITDA guidance in FY23, which means it's trading on a bit over four times EBITDA today, which is just way too cheap.
They flag organic growth to kick in, and there's definitely going to be M&A still to come — that's the style of their management team.
The stocks sold off heavily because of the merger they did with 5G Networks and a lot of shareholders that took scrip from 5G, we think, have just sold into a liquid market at the time the general markets are selling off.
We'd view that as an opportunity. And I think that at this price, it actually becomes an acquisition target itself for someone like web.com or one of the majors to just lob a bid, because to us it just looks too cheap.
We think that'll correct in time. But in the meantime, I'd probably say it's a near-term buy opportunity.
MF: This is the company that's also betting on existing domain owners to transfer to the new .au domains to accelerate its business?
HG: Yeah, that's correct. That's just one of the tailwinds behind this business. They've given us a brief update on how sales have gone in .au thus far. We expect more detail at the half-year results this month. We think that'll be positive. It's definitely going to be growing as a nice tailwind.
One important point to note is that with domains, if you're Webcentral, you receive the cash for, let's say for a two- or three-year domain sale, upfront — but then you only book the revenue each month as it's incurred. So what you'll see is you won't see revenue jump, but you'll see a cash jump.
So I'd just flag that's probably the metric to watch, but hopefully the company will give more detailed numbers around how that looks.
MF: And your second best buy at the moment?
HG: Well, the other one that we've been buying lately is ARC Funds Ltd (ASX: ARC) for the reasons that I outlined earlier.
So last year when we joined the board, all of 2021 was just about pivoting the strategy, giving us a good sort of platform to launch off. I think we did that with the two managers that we secured in Magnum and Mario. They're both now going well, Mario's up and running and Magnum will launch their fund fairly soon. But this year, with the share price re-rated and with our shareholders happy and everything going in the right direction and a really nice pipeline, we think this year is all about growth. So we've been buying that of late.
We expect it to, like I said before, it all comes down to execution. If we do our job, then I think we've got some upside there.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
HG: In small caps we've got heaps of stocks wrong and you can't avoid getting them wrong. It hurts when you lose money, but it's just part of the game.
At Capital H we try to pride ourselves on being a small-cap specialist, which means that we need to be across the entire market. It doesn't annoy me if we get a stock wrong, it doesn't annoy me if we take a view on a stock and then that view is wrong. But what does annoy me is if we don't get around to making the effort to look at a stock and at least form a view, then they end up being multibag — that really frustrates me.
So there's been unfortunately plenty of those over the last sort of 10 years or so. Too long to list, but we try to use that frustration when we do miss one to get onto the next one.
MF: Is there one painful one off the top of your head you could name?
HG: I remember years ago, Altium Limited (ASX: ALU). We missed that one, when we were much smaller.
I think probably one that was in our wheelhouse that we missed because it was a bit big for us was Pinnacle Investment Management Group Ltd (ASX: PNI). Pinnacle has the same business model as ARC Funds. That's one that we probably should have been more across.
But look, everyone missed Afterpay. We probably should have been more across the Afterpay story. That was one that I didn't really understand from a product user perspective and therefore missed the stock.
