As many investors look forward to a bullish 2024, the obvious question is which ASX shares are the best to buy now to rake in those gains?
There is some agreement that small-cap stocks might be due for a boom after a couple of years of underperforming versus their larger brothers.
However, DNR Capital portfolio manager Sam Twidale points out there is a whole universe to consider, even within small caps.
"Small-cap investors are faced with a dilemma today – buy cheap cyclical companies offering value or look at more expensive defensives that have resilience and earnings but come with high valuations?" he said in a DNR Capital video.
Twidale's team is buying up ASX shares that are trading cheaply because of some immediate pain.
"We favour quality businesses that have some concerns in the short term but are well managed with strong balance sheets and well placed in the longer term," he said.
"Investors with a longer term… investment horizon should be looking at these types of companies."
The past has nothing to do with the future
Twidale specifically named three "de-rated" small-cap stocks that are excellent examples of this "pain now, pleasure later" approach.
"One such company in our fund is IPH Ltd (ASX: IPH). This is a market leader in providing intellectual property (IP) services."
Just this year, the stock has lost 20.9%.
But Twidale's analysts are not worried.
"It's trading at a decade-low valuation as there are some concerns around short-term.
"But it has established a market leadership position in Australia and is a growing international business."
The Credit Corp Group Limited (ASX: CCP) share price plunged 36% in just a few stressful days in October.
To Twidale, the reason investors fled has nothing to do with its future prospects.
"The company presented a trading update recently highlighting weaker collections in the US which saw a dip in its share price. But we think that's more backward-looking."
The stock price for the debt buyer is now at an absolute bargain in proportion to its growth potential.
"Looking forward, the company is looking at opportunities to buy debt books at much cheaper valuations," said Twidale.
"Valuation is now trading at sort of a load that you haven't seen since the global financial crisis. So it's a cheap valuation for an industry leader in this sector."
Go overweight in these small-caps
Again, taking a long-term view, Twidale's team is taking a "core overweight" position in the consumer discretionary sector.
"Now is a great opportunity to buy these high-quality businesses at much lower valuations because of concerns around consumer spending in the short term.
"A company in this sector that we like is Lovisa Holdings Ltd (ASX: LOV), a leading fast fashion accessories retailer."
His team first invested in Lovisa five years ago when it had fewer than 300 stores in Australia.
"Since then, it has grown to over 800 stores, growing its presence internationally. It has a potential to have more than 1000 stores."
Twidale feels like the short-term traders are missing the longer vision.
"The market is focusing on the short-term metrics like sales growth and impact of weaker consumer spending but is missing the bigger picture opportunity of ongoing store expansion as it continues to diversify internationally."
