2 small-cap ASX shares to ride on their way up: expert

This pair must be doing something right, because its peers are struggling.

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After a promising start to the year, small-cap ASX shares have once again been hammered over the past month.

The S&P/ASX Small Ordinaries (INDEXASX: XSO) index is now more than 23% down from its peak in November 2021.

Cyan Investment Management portfolio managers Dean Fergie and Graeme Carson admitted there are still plenty of reasons for small caps to struggle.

"There are still headwinds in the market: a lack of corporate activity which has declined markedly from two years ago, diminished investor engagement and associated low volumes and, for the moment, higher interest rates," their memo to clients read.

However, great news is that markets are cyclical.

"These are all negative factors that are occurring simultaneously, but cannot continue indefinitely," read the Cyan memo.

"Of course, the timing of such turnarounds is difficult to predict, but our experience in the past has been when investor exasperation is at a peak, and most selling has impacted the market, this is often the time when the tables turn."

Two rising small cap stocks to quickly latch onto

Among this small-cap wreckage, when particular stocks manage to rise it's worth investors paying attention.

After all, they must be doing something right.

The Cyan analysts named two such gems in their portfolio that went gangbusters during reporting season: Silk Logistics Holdings Ltd (ASX: SLH) and Big River Industries Ltd (ASX: BRI).

They respectively rose 6.8% and 12% over February.

"Warehousing and logistics provided Silk Logistics produced yet another strong result with revenue up 39% and NPAT up 32%, along with a dividend of 5.3 cents per share." 

The fund managers are shocked at how cheap the stock is, even after rallying 10.75% year to date.

"We're surprised the stock isn't pushing much higher given the recent results and its attractive valuation metrics," read the memo.

"Silk Logistics is trading on a PE of just 11x and is paying a 5% fully franked yield — all with a net cash balance of $34 million on its balance sheet."

Big River Industries also reported well last month.

"Building products supplier Big River Industries reported strong performance with revenue up 20% and NPAT rising 34% along with a dividend to shareholders of 8.6 cents per share," the memo read.

"Big River's customers are well diversified across Australia and industries with products supplied to residential development and commercial builders and a growing civil client base with the outlook strong across the board."

The Cyan portfolio managers said that the "silver lining" with the current low liquidity environment with small caps is that "it can magnify share price movement on the upside as well as the down".

"Some optimism can be taken from the most recent RBA rate decision on 7 March that indicated there may be a pause in further rises — a distinct change from prior commentary," read their memo.

"That, combined with some extreme quantitative value in the marketplace, gives us some near-term optimism."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Silk Logistics. 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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