With interest rates almost guaranteed to head upwards this year, multiple experts are emphasising profitability, or at least positive cash flow, as essential for investment.
"As interest rates rise, if you don't have any profit or cash flow coming through then your valuation is going to deteriorate very rapidly," Burman Invest chief investment officer Julia Lee told Switzer TV Investing this week.
"So it is important to back those more mature companies… that do have a stable growth outlook as well as profit coming in through the door."
On top of this, the team at Wilsons reckon small cap ASX shares are especially due for a revival.
"On a valuation basis, small cap PE ratio multiples have compressed almost 20% since the peak in 2020 and now sit in line with the 5-year average," read its memo to clients.
"This suggests Australian small caps are now approaching an oversold level."
So combining the need for cash flow and small-cap potential, Wilsons analysts named 5 ASX shares from its Australian Equity Focus List that are worth considering at the moment.
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Small caps that are also profitable
All of Wilson's picks are currently profitable except for Telix, which is scheduled to head into the black in the 2024 financial year:
- Pinnacle Investment Management Group Ltd (ASX: PNI)
- Healthco Healthcare and Wellness REIT (ASX: HCW)
- Judo Capital Holdings Ltd (ASX: JDO)
- Silk Laser Australia Ltd (ASX: SLA)
- Telix Pharmaceuticals Ltd (ASX: TLX)
Out of the group, the analysts rate Silk Laser and Telix as the highest conviction buys.
"Silk Laser offers laser hair removal and other non-surgical aesthetic products and services," read the Wilsons memo.
"Operational performance remains encouraging, leveraged to COVID reopening."
The team added that the stock price might be depressed due to "a perceived overhang" from private equity firm Advent International's shares recently coming out of escrow.
Wilsons isn't the only advisory firm bullish on the stock. Morgans investment advisor Jabin Hallihan also rated Laser Silk shares as a buy last week.
"The full-year outlook is for solid growth," he told The Bull.
"The company generated revenue of $182.5 million in the 2022 first half — an 18.5% increase on the prior corresponding period."
Telix, meanwhile, has just received clearance from the US Food and Drug Administration (FDA).
"We look for news flow on sales and revenue success beginning later this half," stated Wilsons.
"Large capital raising in 4Q21, with cash break-even still 12-24 months away."
