ASX stocks come in all shapes and sizes, but in recent weeks, there's been a particular focus on small-cap shares.
With quarterly updates from many fund managers making the rounds, we now get a unique insight into the positions these market players hold.
Forager Funds Management has highlighted three ASX stocks, all valued at less than $1 billion in market capitalisation, as potential future winners.
Forager flagged Catapult Group International Ltd (ASX: CAT) and Tyro Payments Ltd (ASX: TYR) in its 2024 Investor Roadshow as businesses with long-term potential.
It also labelled NZX Ltd (NZE: NZX) as one to watch internationally.
Here's what the fund manager said.
ASX stock poised for growth
Catapult Group has become the largest position in Forager's portfolio. Known for its wearable technology used by professional sports teams, the company offers devices that allow coaches to monitor player performance in real-time.
The firm said Catapult's wearable technology produces "sticky" revenues, with the company expecting over 15% sales growth annually for the next three years.
Chief investment officer Steve Johnson praised Catapult's recurring revenue model and low churn rate of just 4% per year.
Once a professional sports team starts using Catapult's technology, they rarely switch it off.
The management team has come through, integrated the product, spent the money to do that, and now [is] showing very strong signs of continuing this operational leverage.
The ASX stock has also focused on converting this growth into meaningful free cash flow, Johnson says. It currently trades at $2.02 per share.
Tyro Payments another favourite
Tyro Payments is one of Australia's largest payment providers, with around 70,000 merchants on its network.
Despite facing macroeconomic headwinds, Forager is constructive on the ASX stock's prospects.
Now you would have seen Tyro terminals around they are the leading independent payment terminal provider, it's a big alternative for small and medium Enterprises to the major Banks…
…It is trading at the moment on about a 10% free cash flow yield, particularly attractive. It is facing into some macro headwinds which has caused other investors to sell that stock down.
Morgans is also bullish on Tyro with a $1.47 price target. The broker is attracted to Tyro's "much greater focus on lifting overall profitability", according to my colleague James.
NZX also gets a mention
Johnson also discussed the fund's position in NZX Ltd, the operator of the New Zealand Stock Exchange.
According to Forager, it offers a diversified revenue stream through exchange-traded funds (ETFs), low-cost funds management, and wealth technology services.
The ASX stock has seen low market turnover recently, which Forager Funds believes is cyclical. It expects incremental revenue and is attracted to NZX's fixed cost base.
The cost base here is quite fixed, so that should see a significant amount of incremental revenue come down to profit.
[Meanwhile], the funds management business has been growing for quite some time and continues to do so and on the wealth technology business, they've won some new clients recently. That's a business that nzx had spent more than $40 million on over the last five to 10 years…
…we think that business is close to becoming uh free cash flow neutral and that will be a big boom for the amount of free cash flow that the whole business generates.
Forager thinks NZX could produce over a 10% free cash flow yield to enterprise value based on projections out to FY26.
ASX stocks to watch
These ASX stocks, each valued at less than $1 billion, have shown strong potential for growth and profitability.
They could be worth watching. Forager Funds' selections highlight the fund's confidence in its future performance.
But there is no saying what can happen from here. Investment funds such as this run highly diversified portfolios to cover the downside.
In that vein, remember to conduct your own due diligence and consult professional advice when necessary.
