ASX small-cap stocks have the greatest potential to beat the market.
If you bought shares in healthcare giant Pro Medicus Ltd (ASX: PME), furniture retailer Nick Scali Ltd (ASX: NCK), or technology company Life360 Inc (ASX: 360) when they were much smaller companies, you'd be pretty happy with your returns today.
However, finding a promising small-cap business that can compound earnings for years or even decades can be a difficult endeavour.
Compared to institutional investors, retail investors face additional challenges. Without access to management or sufficient information to uncover a small company's prospects, such companies can fly under the radar.
Fortunately, investment banking powerhouse Macquarie Group Ltd (ASX: MQG) has revealed its top ASX small-cap consumer discretionary pick.
Top pick revealed
In its 23 September report, "UNi-que opportunity", Macquarie named Universal Store Holdings Ltd (ASX: UNI) as its top ASX small-cap consumer pick.
Universal Store owns a portfolio of premium youth fashion brands and wholesale businesses. Its main businesses are Universal Store (trading under the Universal Store and Perfect Stranger brands) and CTC (trading as THRILLS and Worship brands).
The company currently has 112 physical stores in Australia and has aspirations to launch in New Zealand.
Macquarie credited Universal Store for being able to stay 'on trend' with its young customer base, which typically ages between 15 and 25, despite a challenging environment for apparel retailers generally. This allowed the business to expand gross profit at a compound annual growth rate (CAGR) of 19% between FY22 and FY25.
The broker also described Universal Store as 'attractively priced', trading at 7 times NTM EV/EBITDA. Macquarie noted that this is an 8% discount to its ASX apparel peers, and a 41% discount to international peers.
The broker believes the company is undervalued, given macro tailwinds to youth apparel consumption from a changed HECS policy in FY26E.
How much upside is expected?
Given these factors, Macquarie has assigned Universal Store an outperform rating and price target of $10.20.
In support of this price target, the broker expects "strong sales growth, improving consumer demand environment & increased conversion + penetration into private label product, alongside ongoing store rollout supporting network sales growth."
The company offers an attractive dividend yield of 3.78% at the time of writing.
Given that Universal Store shares are trading at $8.73 at the time of writing, that suggests more than 20% upside from here, including dividends and capital growth.
Foolish Takeaway
This week, Macquarie revealed its top ASX small-cap consumer discretionary pick. With interest rates expected to fall further, ASX investors may find themselves hunting for consumer discretionary opportunities. This could be an opportune time to consider adding Universal Store to your portfolio.
