Big share price drops like that are never fun to go through (unless you are a short seller, of course), and so it's normal to feel down about it. But moments like this are when clarity of thought is so important for investors.

Here's how I think smart investors would be responding to a situation like this.

Hear it from the horse's mouth

Rather than panicking or relying solely on news headlines, smart investors go straight to the source to read the announcement carefully and listen to the conference call.

That's where you can pick up all the details and full context for what has gone wrong and what management plans to do about it. Independent thinking is such an important skill for investors, and it starts with getting the right information, then objectively evaluating it.

It's OK to sell and move on

If material new information come to light that significantly diminishes the investment opportunity (i.e. you no longer believe this investment will outperform the market going forward), then I think you must be prepared to cut your losses and move on.

This is not a decision to take lightly, of course, and it's possible that you might be selling at exactly the worst time. However, investors have to make decisions looking forward, and they are not always easy decisions.

Conversely, there are moments where holding (or even buying) is the right decision, and you have to learn how to make that distinction.

I think it's helpful to have a process that you test and refine over time that can guide you in times where you are more vulnerable, making an emotionally charged decision.

Don't rush to buy

Just because a stock is down 33% doesn't mean it can't go down even more. A $100 stock that drops 90% to $10 can still decline another 90% to $1.

That's why I think it's helpful to have a healthy amount of respect for big market moves, especially to the downside. Markets can overshoot, of course, but giving it time to do your research and understand your variant perception (why you might be right whilst the market is wrong) is important.

Reflect on your process and position sizing

Smart investors use big stock moves as an opportunity to reflect on their investment process and approach to position sizing.

It's important to have an honest self-reflection to diagnose what went wrong and what the key learnings are. We are all learning along the way, and no one has a perfect process. Continuous improvement to your investment process can yield significant long-term results.

And whilst there is no one-size-fits-all approach to position sizing, typically a full position size is large enough to make a material impact on a portfolio when things go well and not so large that it destroys the entire portfolio when things don't go well.

There is also an emotional side to this. Some investors can sleep perfectly at night with a 20% position size in one stock, but others would want to keep it lower.

The point is, it's hard to tell which investor you are until you are tested in a real-life scenario. When a stock you own drops 33% and it causes an unbearable amount of anguish, it's an indicator that perhaps the position size was too large.

Shift your focus to the best companies you can find

Investing is a constant search for the best opportunities available to you, and you can't get too hung up on your mistakes when things go wrong. A healthy dose of optimism is helpful, and your focus must be firmly on finding the best opportunities out there. You never know when you might come across the next big winner.

Foolish Bottomline

Big one-day drops can be scary, but you are likely to experience them at some point as an investor. When it happens, don't beat yourself up too hard. Instead, reflect on what you can learn, refine your process, and stay positive. You'll likely become a much better investor and one well prepared to take the next opportunity when it comes.

The post This ASX small cap fell 33% in one day. Here's how smart investors respond appeared first on The Motley Fool Australia.

Four ASX shares that are falling more than most today are listed below. Here's why they are dropping:

Eroad Ltd (ASX: ERD)

The Eroad share price is down 35% to $1.67. Investors have been selling this software company's shares today after it announced plans to refocus its growth strategy on the ANZ market and step back from its North American expansion plans. The company's CEO, Mark Heine, said: "I am incredibly excited by the opportunities ahead at EROAD, as we focus on what matters most to our customers and our growth." In addition, due to weakness in the US market, the company downgraded its revenue and cash flow margin guidance for FY 2026.

Iluka Resources Ltd (ASX: ILU)

The Iluka Resources share price is down 7% to $7.72. This morning, this mineral sands company withdrew its synthetic rutile guidance. It made the move due to uncertainty relating to an agreement to sell the commodity to UK customer Venator. This follows news that Venator's titanium dioxide (TiO2) manufacturing site at Greatham UK is idled and may remain in a shutdown state while a sale takes place.

Lynas Rare Earths Ltd (ASX: LYC)

The Lynas Rare Earths share price is down 9.5% to $18.47. Investors have been selling off rare earths shares today following comments out of the Chinese government. According to CNBC, China's Ministry of Commerce has accused the US of creating panic over controls on rare earth exports and advised that it is open to trade talks. It is possible the market suspects that a deal will be reached on restrictions and that rare earths price could fall.

Vulcan Energy Resources Ltd (ASX: VUL)

The Vulcan Energy share price is down 8% to $6.58. This follows weakness in the lithium industry which has overshadowed the release of an announcement from the lithium developer this morning. Vulcan revealed that it has named Australian company, JordProxa, as the technology and equipment partner for the lithium purification, concentration, and conversion process for the Phase One Lionheart Project in Germany. Vulcan Energy's CEO, Cris Moreno, said: "JordProxa is a leading company in the purification and concentration of battery grade materials, and we are delighted to be using this world-class experience to deliver our flagship Phase One Lionheart Project."

The post Why Eroad, Iluka, Lynas, and Vulcan Energy shares are tumbling today appeared first on The Motley Fool Australia.

At the time of writing, this technology company's shares are down a whopping 39% to $1.57.

Which ASX tech stock is crashing?

The stock that is being sold off this morning is Eroad Ltd (ASX: ERD).

It is a hardware-enabled SaaS company delivering safety, compliance, sustainability and efficiency solutions for complex vehicles fleets.

In a surprise move, the ASX tech stock has announced that it will refocus its growth strategy on Australia and New Zealand (ANZ), stepping back from its previously ambitious North American expansion plans.

According to the release, management advised that the decision follows slower-than-expected growth in the United States, where market conditions are elongating enterprise sales cycles.

In addition, the company believes that prioritising a significant ANZ opportunity in electronic road user charging (eRUC) will deliver better results. The eRUC is a system for distance and weight-based road funding that is expected to roll out across 4.6 million vehicles in New Zealand in the years ahead. It will replace fuel excise duties.

Guidance downgrade

Due to its weaker than expected performance in the United States, the ASX tech stock has downgraded its guidance for FY 2026.

It now expects revenue of NZ$197 million to NZ$203 million, compared to guidance of NZ$205 million+. In addition, its annualised recurring revenue (ARR) is forecast to be NZ $175 million to NZ$183 million instead of NZ$188 million+.

Also downgraded was its guidance for its free cash flow margin. This is now expected in the range of 5% to 8% instead of 8% to 10%.

It will also record an impairment to carrying value of intangible assets relating to the North American region of up to NZ$150 million.

Despite the above, the ASX tech stock's CEO, Mark Heine, remains positive. He said:

I am incredibly excited by the opportunities ahead at EROAD, as we focus on what matters most to our customers and our growth. Building on EROAD's legacy and credibility in eRUC is particularly energising. As the world continues to trend towards more fuel-efficient vehicles, the need to fund global infrastructure sustainably and more equitably creates significant opportunity for EROAD. We see the 4.6m vehicles in New Zealand as the perfect place to start.

The post Guess which ASX tech stock is crashing 39% on Friday appeared first on The Motley Fool Australia.

The S&P/ASX All Technology Index (ASX:XTX) is up more than 20% in that span. 

For context, the S&P/ASX 200 Index (ASX: XJO) is up 7% in that same period. 

One technology stock that has drawn attention from brokers is Eroad Ltd (ASX: ERD). 

A blistering year 

Many investors might not have heard about this small-cap share. 

Eroad is a New Zealand-based company that develops and supplies technology solutions, products, and services to assist in the management of vehicle fleets. 

The company offers integrated technology covering tolling and other payments, vehicle tracking, emissions management, and driver safety data and feedback.

12 months ago shares in this ASX technology stock were trading for $1.06 each. 

Yesterday, they closed at $2.26 per share, representing a 113.21% rise in the last year. 

Regulatory tailwinds inbound

One catalyst that has driven the recent share price climb is the recent news of the New Zealand Government's plan to transition all New Zealand vehicles to electronic Road User Charging (eRUC). 

This kind of regulatory tailwind gives the company a strong addressable market and can significantly boost expectations of future revenue and cash flows.

Arthur Garipoli, Seneca Financial Solutions, believes this is reason for optimism on the ASX technology stock. 

Of major significance to the company is the New Zealand Government planning to transition all vehicles to an electronic road user charging system (eRUC), replacing the fuel excise currently charged on petrol. 

This combats an increasing uptake in electric and hybrid vehicles and ensures all road users contribute to the cost of maintaining and improving New Zealand's transport network. 

He also said the company has a dominant market share of eRUC in New Zealand and has first mover advantage. 

He said the team at Seneca believes regulatory tailwinds will generate continuing growth for this stock.

Price targets elsewhere suggest it has room for growth. 

TradingView has a 12 month price target of $2.70 which indicates approximately 19% upside. 

Online brokerage platform Selfwealth also lists it as undervalued by approximately 19%. 

The post Why this fantastic ASX technology stock is a buy now appeared first on The Motley Fool Australia.

On Friday, several ASX tech stocks ripped to new highs after the Nasdaq Composite Index (NASDAQ: .IXIC) hit a record the previous night.

Meanwhile, the S&P/ASX 200 Index (ASX: XJO) fell 1.03% over the week to close at 8,773.5 points on Friday.

The energy sector was the biggest drag last week, falling 4%, after the foreign takeover bid for Santos Ltd (ASX: STO) was withdrawn.

Just three of the 11 market sectors finished the week in the green.

Let's recap.

ASX 200 technology shares led the market last week

Tech sector darling Life360 Inc (ASX: 360) was among 9 ASX 200 shares that reached multi-year high share prices on Friday.

The Life360 share price rose 5.3% over the week to close at $51.96, after reaching a record $52.40 during intraday trade on Friday.

Nextdc Ltd (ASX: NXT) shares set a new 52-week high of $18.22 on Friday, and rose 2.8% over the week to finish at $17.81.

The Siteminder Ltd (ASX: SDR) share price reached a four-year high of $7.20 on Friday before closing at $7.14, up 3% over the week.

The Betashares S&P/ASX Australian Technology ETF (ASX: ATEC) also reached a new record of $33.42 per unit on Friday.

ATEC, which seeks to track the S&P/ASX All Technology Index before fees, was among 68 ASX ETFs that smashed records on Friday.

Several ASX small-cap tech shares also hit new highs on Friday.

The Hansen Technologies Ltd (ASX: HSN) share price closed at a four-year high of $6.22 on Friday, up 7.4% for the week.

Energy One Ltd (ASX: EOL) shares reached an all-time high of $18 on Friday before closing at $17.95, up 11.8% over the week.

Infomedia Ltd (ASX: IFM) shares closed at a 52-week high of $1.72, up 2.4% over the week.

Eroad Ltd (ASX: ERD) shares reached a three-year high of $2.63 on Friday before finishing the session at $2.55, up 8.1% last week.

Other tech sector price changes

Turning our attention to large-cap ASX 200 tech shares, WiseTech Global Ltd (ASX: WTC) lifted 1.4% over the week to close at $96.30.

The Xero Ltd (ASX: XRO) share price inched up 0.3% to $162.59.

TechnologyOne Ltd (ASX: TNE) shares rose 0.8% to $38.35.

Codan Ltd (ASX: CDA) shares fell 3.1% to $29.98.

The Megaport Ltd (ASX: MP1) share price lifted 0.8% to $15.01.

The Catapult Sports Ltd (ASX: CAT) share price increased 4.4% to close at $7.09.

The Iress Ltd (ASX: IRE) share price rose 2.4% to $9.34.

Macquarie Technology Group Ltd (ASX: MAQ) shares rose 5.5% to $65.07 ahead of their departure from the ASX 200.

Macquarie Tech is among 9 shares leaving the ASX 200 in the next index rebalance, effective tomorrow.

ASX 200 market sector snapshot

Here's how the 11 market sectors stacked up last week, according to CommSec data.

Over the five trading days:

The post Life360, NextDC, and Siteminder shares reach new highs amid tech sector lead last week appeared first on The Motley Fool Australia.

Four ASX shares that are not letting that hold them back are listed below. Here's why they are rising:

Electro Optic Systems Holdings Ltd (ASX: EOS)

The EOS share price is up a further 15% to $4.99. Investors have been fighting to get hold of the defence and space company's shares this week following the announcement of a major contract win. In response to the update, Bell Potter retained its buy rating and lifted its price target to $5.00. It said: "The award of the HELW contract gives EOS a first mover advantage in a new counterUAS vertical and presents potential investors with a new angle to gain leverage to the emerging drone warfare thematic. We continue to anticipate material contract awards in 2H25, including Land400."

Eroad Ltd (ASX: ERD)

The Eroad share price is up 28% to $1.84. This may have been driven by news that New Zealand's Transport Minister, Chris Bishop, has unveiled the Government's plan to transition all New Zealand vehicles to electronic Road User Charging (eRUC). The fleet tracking company's co-CEO, Mark Heine, said: "As New Zealand transitions away from fuel excise taxes, eRUC offers a future-ready and proven solution that reflects how we actually use our roads. It's a system that's not only more equitable, but also more efficient and better aligned with our climate and infrastructure goals. We applaud Minister Bishop for taking a step towards modernising how New Zealand funds its transport infrastructure." Eroad has already played a key role bringing eRUC to New Zealand.

Neuren Pharmaceuticals Ltd (ASX: NEU)

The Neuren Pharmaceuticals share price is up 4% to $17.69. This morning, the pharmaceuticals company released an update on sales of its Daybue product. Neuren revealed that second quarter Daybue net sales were US$96.1 million, up 14% from both the prior corresponding period and the first quarter. It also highlights that a record number of patients in the US received shipments, growing for third consecutive quarter. In light of this, the company earned A$14.7 million in royalty income for the three months.

Westgold Resources Ltd (ASX: WGX)

The Westgold Resources share price is up almost 6% to $2.92. This follows the release of the gold miner's guidance for FY 2026. Westgold is guiding to production of 345k ounces to 385k ounces for the year. This represents a 5.7% to 18% increase on FY 2025's production. This is expected to be achieved with an all-in sustaining cost (AISC) of $2,600 to $2,900 per ounce. This compares to its AISC of $2,666 per ounce in FY 2025.

The post Why EOS, Eroad, Neuren, and Westgold shares are roaring higher today appeared first on The Motley Fool Australia.

Patience and perseverance can go a long way in this lifelong endeavour. If you turn over enough stones, you'll eventually find those rare companies — the misunderstood, underappreciated, or simply ignored businesses primed for success.

This month, I've uncovered a little ASX growth stock that is now high on my buy list.

Profits could send this soaring

Companies that are not yet profitable can be difficult to value. As onlookers haphazardly speculate on the future, this can lead to wildly exuberant or sunken share prices. Fortunately, this wayward estimation can also give rise to undervalued opportunities.

Sometimes, the mood among a company's shareholders falls into a rut. Good news becomes bad news, and bad news becomes terrible news. The despair stage can narrow investors' vision, clouding genuine positive signs.

Enter Eroad Ltd (ASX: ERD): A fleet management technology company attempting to traverse the gap between cash burner and cash earner. If successful, sentiment can quickly shift. A recent example is Xero Ltd (ASX: XRO), with shares now up 19% year-to-date after achieving profitability in FY24.

High revenue growth and profitability are powerful combinations. The New Zealand-based vehicle telematics company Eroad is already reaping revenue growth. In the last three years, its revenue has increased 98.7% to NZ$182 million — a compounding annual growth rate (CAGR) of 25.7% per annum.

On 23 May 2024, this ASX growth stock announced it had achieved a positive free cash flow of $1.3 million in FY24.

Furthermore, according to analyst forecasts, FY26 net profit after tax (NPAT) could be around NZ$10.6 million. Those estimates then expand to NZ$24.4 million in FY27.

If Eroad were to trade on a 30 times price-to-earnings (P/E) ratio, the company's market capitalisation could be A$676.6 million. Right now, Eroad is valued at $162.3 million — leading me to believe this ASX growth stock could be a four-bagger in three years.

Why is this ASX growth stock being ignored?

I'm guessing you're already asking: "Mitchell, why hasn't the share price rallied if the future is so bright?"

It's a good question. Eroad is not without its risks.

My biggest worry is the company's rate of share dilution. Since 2020, the number of shares outstanding has more than doubled (shown below), effectively more than halving the value of each slice of ownership a shareholder owns.

I'll be keeping a close eye on it, although I'm optimistic, given Eroad is now free cash flow positive.

The post ASX growth stock on the cusp of profitability: My multibagger pick appeared first on The Motley Fool Australia.

Four ASX shares that are not letting that hold them back today are listed below. Here's why they are rising:

Azure Minerals Ltd (ASX: AZS)

The Azure Minerals share price is up 11% to $1.38. Investors have been buying this lithium share since the release of positive drilling results from the 60% owned Andover project. Management said that it is "confident that our project has the potential to host lithium resources of world-class scale."

Eroad Ltd (ASX: ERD)

The Eroad share price is up 64% to $1.16. This follows news that the fleet management solutions provider has received a non-binding takeover offer from Canada's Constellation Software Inc (TSX: CSU). An offer of $1.30 per share has been tabled. This represents an 84.4% premium to its last traded price and values Eroad at $146.8 million.

Predictive Discovery Ltd (ASX: PDI)

The Predictive Discovery share price is up 3% to 16 cents. Investors may believe that this gold share has been oversold recently. Investors were selling down Predictive Discovery's shares following the release of assay results from its ongoing drilling programs at the Bankan Gold Project in Guinea.

Talga Group Ltd (ASX: TLG)

The Talga share price is up 2% to $1.40. This has been driven by news that this graphite developer has received the environmental permit for its commercial battery anode plant in Lulea, Sweden. This allows Talga to commence refinery construction groundworks in the third quarter of 2023. It will be Europe's first commercial natural graphite anode plant.

The post Why Azure Minerals, Eroad, Predictive Discovery, and Talga shares are rising appeared first on The Motley Fool Australia.

Prolific tech acquirer and operator Constellation Software Inc (TSX: CSU) has lobbed a non-binding indicative offer (NBIO) at Eroad via a wholly-owned subsidiary this morning. This follows earlier reports of the Canadian tech company, founded by billionaire Mark Leonard, buying up 17.7% of Eroad shares at NZ$1.30 apiece.

Before today, the Eroad share price sat at $0.705. The company's shares are up 47% over the past month, yet, they are still 54% worse than where they were a year ago. Eroad requested a trading halt before trading commenced today amid management's discussions.

Adding to its tech portfolio

Canadian software powerhouse Constellation Software may not immediately ring bells among Aussie investors. However, valued at approximately A$63.5 billion, the beastly business is on par with the likes of Wesfarmers Ltd (ASX: WES) and Woodside Energy Group Ltd (ASX: WDS).

The company has rewarded long-term shareholders handsomely since its 2006 listing. Constellation Software shares far exceed any benchmark, up 14,560% over their listed life. An achievement made possible through executing its mission to acquire, manage, and build market-leading software businesses.

Having acquired over 500 companies in its history, New Zealand fleet management solutions company Eroad has found its way onto the Canadian's acquisition conveyor belt.

According to a release, Brillian APAC Pty Ltd — part of Volaris group and a subsidiary of Constellation Software — purchased shares in the ASX tech stock on Wednesday. Brillian tallied up 20,025,091 shares in Eroad in total, giving it a 17.7% stake in the company.

Since then, Eroad has received an NBIO for 100% of the company at $1.30. The proposed price represents an 84.4% premium to its last traded price and values Eroad at a market capitalisation of $146.8 million.

For the last 12-month period, Eroad reported NZ$34.5 million cash outflow on NZ$174.9 million in revenue. Furthermore, the company held a net debt position of NZ$62.5 million at the end of March 2023.

What's next for this ASX tech stock?

Today's offer will now undergo the process of due diligence, negotiation, and consideration by Eroad's board. Notably, the release highlighted that the board will evaluate partnership options to drive further growth in its North American expansion.

The ASX tech stock may resume trading today following the proposal announcement.

Following the publication of this article, Eroad shares have since resumed trading on Thursday. At the time of writing, the Eroad share price is up 61.4% to $1.14 on the ASX.

The post Guess which little ASX tech stock this billionaire is looking to acquire appeared first on The Motley Fool Australia.

The All Ordinaries Index (ASX: XAO) is down 0.34% on the day so far. Earlier in the session, it was in the green.

However, these two ASX All Ords shares have outstripped the pack today and are posting tidy gains.

Whispir Ltd (ASX: WSP)

The Whispir share price is pushing 17.89% higher today on no news. Shares in the communication technology company have been punished in 2022, posting a loss of 48% in that time.

What could be behind the rise in this tech share today is a fall in long-dated government bond yields.

Valuations of tech shares are closely related to movements in bond yields. The mathematical relationship roughly dictates that as bond yields fall, the valuations on risk assets such as tech shares begin rising, and vice-versa.

Indeed, the relationship is especially sensitive in technology shares. In fact, this has largely explained the large drawdown in the ASX tech basket in 2022. As yields have spiked, this has compressed tech share prices.

However, yields on long-dated government bonds have been in a consolidation phase since 14 June.

The current yield on the 10-year Australian note is 3.4%, dropping from a high of more than 4% last month.

Given the relationship described above, the pullback seems to be a bullish sign for tech shares like Whispir.

Certainly, investors are bidding up the stock today on a daily volume of 96% of the company's four-week average trading volume. The Whispir share price is now $1.12 apiece.

Eroad Ltd (ASX: ERD)

Investors drove the Eroad share price to a gain of 18.15% at the time of writing despite no market sensitive updates from the company.

However, similar to Whispir, this All Ords tech share has climbed along with the pullback in government bond yields.

Prior to today's gain, the company's share price had stamped its 52-week lows last week, closing at $1.26 on 30 June. This followed a sustained downward run across the 12-month period.

Unprofitable tech shares like Eroad endured a significant down-rating from investors in 2022. However, if the trend in bond yields continues, it could spell further upside for the sector.

In the last 12 months, Eroad has lost more than 71%, now trading at $1.66 per share.

The post Guess which ASX All Ords shares are serving up 15% gains today appeared first on The Motley Fool Australia.

Four ASX shares that have failed to follow the market higher today are listed below. Here's why they are tumbling:

Adbri Ltd (ASX: ABC)

The Adbri share price is down 5.5% to $2.85. Investors have been selling this building products company's shares in response to a broker note out of Morgan Stanley. According to the note, the broker has downgraded the company's shares to an equal-weight rating with a lowered price target of $3.40.

Eroad Ltd (ASX: ERD)

The Eroad share price is down 5.5% to $2.76. This morning the transport technology company released its fourth quarter operational update. That update revealed modest 2.6% growth in contracted units to 208,697 units. Some investors may have been expecting stronger growth from Eroad.

Lynas Rare Earths Ltd (ASX: LYC)

The Lynas share price is down 2% to $9.49. This appears to have been driven by a broker note out of Goldman Sachs this morning. According to the note, the broker has initiated coverage on the rare earths producer's shares with a neutral rating and $9.50 price target on its shares. Goldman believes Lynas' shares are "fully valued" at the current level. For this reason, its analysts believe Iluka Resources Limited (ASX: ILU) would be the better option for investors seeking rare earths exposure.

Perpetual Limited (ASX: PPT)

The Perpetual share price is down 2.5% to $31.38. This fund manager's shares have come under pressure this week in response to news that Pendal Group Ltd (ASX: PDL) has rejected its takeover approach. The Perpetual share price dropped to a two-year low at one stage on Wednesday morning.

The post Why Adbri, Eroad, Lynas, and Perpetual shares are tumbling appeared first on The Motley Fool Australia.

Four ASX shares that have failed to follow the market's lead today are listed below. Here's why they are sinking:

A2 Milk Company Ltd (ASX: A2M)

The A2 Milk share price is down almost 4% to $7.11. This follows reports that the embattled infant formula company will be hit with a second class action. In addition, this morning the team at Credit Suisse retained their underperform rating and $5.50 price target on the company's shares. The broker believes the market is mispricing A2 Milk's shares.

Eroad Ltd (ASX: ERD)

The Eroad share price has tumbled 8% to $4.85 following the release of the transportation technology services company's quarterly update. That update reveals that Eroad has downgraded its standalone revenue growth guidance for FY 2022 to 10% to 13%. Management blamed this on challenging trading conditions, particularly in North America. In that segment, the company saw a reduction in contracted units.

Flight Centre Travel Group Ltd (ASX: FLT)

The Flight Centre share price has fallen 5.5% to $20.42. This decline appears to have been driven by the issue of convertible notes. This morning the travel agent confirmed that it has raised $400 million through a senior unsecured convertible notes offering maturing in 2028. Flight Centre intends to use the net proceeds to pay down existing debt and fund its growth vision into the future.

Webjet Limited (ASX: WEB)

The Webjet share price is down 3.5% to $6.27. This morning the team at Macquarie downgraded the online travel agent's shares to a neutral rating with a $6.65 price target. The broker made the move on valuation grounds following recent share price strength.

The post Why A2 Milk, Eroad, Flight Centre, and Webjet shares are sinking appeared first on The Motley Fool Australia.

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Joel Fleming – portfolio manager at Yarra Capital Management's Australian equities team and the UBS Yarra Microcap Fund – explains the risks and rewards of investing in ASX microcap shares.

MF: How would you describe your fund to a potential client?

JF: Microcap investing is all about trying to drive long-term capital growth. That's what we're trying to achieve for our investors.

We offer a diversified portfolio, meaning we invest in stocks from all areas of industry and at various stages of their development.

It is a higher risk area of the market. There's less analyst coverage and fewer professional investors focused on this area.

But for us it really is about taking a long-term view. We try to find companies today that are undiscovered, that have great management teams and that have a great business plan. And it's about being able to execute that plan over the next 3 to 5 years, enabling that company to turn into a really meaningful business within their industry, and creating great returns along the way.

ASX microcap definitions can vary quite a bit. What sort of market cap are you targeting?

Stocks need to be below a $250 million market cap when they go into our portfolio.

Importantly, though, we're not forced sellers just because a company goes into an index or reaches a particular size. We're looking for those truly great businesses that continue to reinvest in themselves, continue to create opportunities and grow into their market. Being able to go on that journey with them allows you to get the most out of these individual decisions, when you've done so much work to understand the business.

That's a differentiating factor in our part of the market. You can really get behind some of these businesses that have a long life cycle in terms of their development.

Is there a minimum market cap that you won't go below?

Approximately $30 million is our lower end.

I draw the line there because it's important that I can offer an investor today something that I should be able to offer them when the fund is a lot bigger.

We are doing a lot of work around that threshold, though, where it's not quite the time to pull the trigger for portfolio inclusion, but where we are familiarising ourselves with the individual opportunity.

Atop the points you mentioned earlier, are there other specifics you look for in ASX shares that could trigger a buy signal?

We think it's critical to do a lot of detailed due diligence ourselves to really understand an opportunity.

Often in smaller companies, everyone is very passionate about their business. And many of them can tell you a fantastic story about why it's a great investment.

Our job, though, is to try and verify the investment thesis. To say, this looks to be a wonderful idea, but is this the team to really make the most of this opportunity? What are going to be the key issues they might face?

Inflection points in a company's development and its critical milestones are key for us. It can be something like the acceptance by a customer, someone giving them that first important contract. That's often the catalyst.

What type of risk management do you employ, and what factors can see you exit a position?

The first point on risk management is that no single position is more than 5% of the portfolio. That means we're managing position sizes and trimming when a business is performing really well.

In terms of selling, in microcaps, sometimes it just doesn't work with that inflection point you were looking for. There are occasions when something may have changed in terms of the competitive or regulatory environment, resulting in our reason for investing being invalidated. At that point, we will cut and run because our thesis has changed.

The other thing is if a business is taken over. There's a lot of M&A today, so that can be a reason a business will exit the portfolio.

And sometimes a stock has hit its valuation. It's important here, when we've captured a lot of value for our unitholders, that we ask whether we are thinking too optimistically about the blue sky and where they might go from here. So, that valuation is also important in terms of when to trim or actually exit the position.

Which sectors look promising to you over the next 12 months?

We like to take a longer-term view. But in the short-term, New South Wales and Victoria are opening up. People want to get outside, have experiences, and do the things they haven't been able to do.

The spend that comes from that in terms of tourism activities, eating out and all of those types of things is one area that will be quite positive. Savings rates are very high and a lot of fire power exists.

Now these things have been discussed a lot. But the way I look at it is a lot of businesses have been acquiring the sales and marketing for whatever they're trying to achieve. So that ability to fly around again, that ability for sales people to get in front of clients and have a real conversation and build up that momentum is an area where I most look forward to seeing the results.

Particularly if you're trying to grow your business in the United States or Europe. It's been hard to do, hard to grow those relationships [until] the opening up of international travel and executives get out on the ground and really restart things.

Which ASX shares do you think will outperform in this scenario?

I like a business based in New Zealand called Eroad Ltd (ASX: ERD). It's a telematics provider. When you look at the amount of data available related to driver safety, compliance, the ability to pay taxes within a complicated tax environment, they've got a very good product.

They're very strong in their core New Zealand market, but Australia and the US are emerging markets for them. And on the sales cadence and being able to get out there again, I think it's a stock that looks really interesting from here.

Then there's Alliance Aviation Services Ltd (ASX: AQZ), a really well run business, with 2 drivers.

First, you've got the mining industry. A lot of these people don't work next door to where they live. Alliance is in a strong position in that market.

Then there's the opportunity – as people travel differently and the larger airlines are more focused on their traditional routes – to have a big part to play in some of those regional operations. And they're really set up to do well there.

Are there any sectors you think will underperform over the coming 12 months?

If you're looking at streaming services, people are likely to lose 1 or 2 of those as they can go and be out and about again. There's been lots of areas, like in parts of retail… where a lot of consumers have spent their money and are more likely to spend in other parts of the market.

There are other sectors where we can find it difficult to validate the investment propostion. Early stage biotechs are ones we typically find where it's very challenging to add value. That's also often the case with very early stage explorers in oil and gas, or minerals.

We like to buy businesses where we think there's an opportunity for them to create real value. And when we look at the risks where we can understand that in the context of the broader portfolio.

If the market closed tomorrow for 5 years, which stock would you want to hold?

This is a really good question to think about.

I would say Pacific Smiles Group Ltd (ASX: PSQ). It's very hard to disrupt going to the dentist.

This is a growth business that has an excellent footprint, and offers a service that is very difficult to substitute. It has a reasonable number of [dental] graduates coming out of university and offers them a good framework, so they don't have to go out and do all the hard things involved with setting up a business.

I'm confident that [in 5 years], Pacific Smiles will be significantly bigger than it is today as they roll out their footprint. Their model today is working really well.

What do you see as the biggest threat for ASX investors over the next year?

Inflation is obviously interesting, and the great debate over whether it's transitory or perhaps more permanent.

Interest rates have provided the market with a very strong tailwind. At some point, the outlook must level if not look to move up. Even though we all know it's coming at some point, we're uncertain how the market will react to that when it becomes more real.

And what do you see as the biggest opportunity in the year ahead?

The best thing about microcaps is that there's always an opportunity.

We've got a huge investable universe. We've got companies that are small and nimble and are looking for opportunities. They're not sitting there trying to protect a legacy business. Instead, they're saying: "How can I solve a problem? How can I give that customer a better proposition tomorrow than what they're getting today?"

That's what exciting with microcaps. It doesn't matter what's happening on the broader macro, there's always a little microcap business out there that's doing something interesting. And they're not on the front page every day. They don't have 26 institutional investors on their register, so they're often not very well understood.

M&A is also a key theme; microcaps are a great hunting ground for M&A. There are lots of larger companies that are feeling quite confident and have strong balance sheets. I think this will continue to be an area where we'll see a lot of activity because often it's cheaper to buy than build. And we've certainly seen a good run of it through this year.

(Direct investors can access the Yarra Microcaps Strategy through the UBS Yarra Microcap Fund, for which Yarra Capital Management is the delegated investment manager. You can find out more about this fund here.)

The post Two small-cap ASX shares primed for the reopening: fund manager appeared first on The Motley Fool Australia.

The company's NZ$16.1 million share purchase plan has closed oversubscribed.

Earlier this morning, the Eroad share price rose 0.67% to $6.00. However, at the time of writing, the shares are swapping hands for $5.93, a fall of 0.5% on the previous closing price.

Let's take a closer look at today's news from the transport technology company.

Oversubscribed share purchase plan

The Eroad share price is wobbling after it received applications for NZ$43 million worth of shares for its NZ$16.1 million share purchase plan.

Under the plan, eligible shareholders were offered up to $30,000 worth of new shares for $5.30 apiece. As a result, the company has decided to accept oversubscriptions of NZ$3.9 million to round out the share purchase plan at NZ$20 million.

The share purchase plan is part of a capital raise helping fund the company's acquisition of Coretex Limited. Eroad will be paying NZ$157.7 million for the telematics vertical specialist provider.

Eroad already raised NZ$64.4 million in the first part of its capital raise. The first stage of the capital raise happened in July. It offered shares for $5.25 apiece – a 9.2% discount on the shares' previous closing price.

The Eroad share price gained 6.6% on the back of news of the acquisition and capital raise.

It's expected the acquisition will be finalised in the second half of the 2022 financial year.

Commentary from management

Eroad's chair Graham Stuart commented on the news driving the company's share price today:

We are delighted with the support we have received from shareholders since we announced the acquisition of Coretex. We have seen strong support through the many conversations we have had with shareholders, the 100% shareholder vote in favour of the transaction and the oversubscribed placement and share purchase plan.

Eroad share price snapshot

It's been a good year for the Eroad share price. It has gained 26% since the start of 2021. It has also increased by 49% since this time last year.

The company has a market capitalisation of around $556 million, with approximately 81 million shares outstanding.

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Established in 2000, EROAD is a technology, tolling and services provider based in Auckland, New Zealand. The company designs and manufactures in-vehicle hardware providing road charging, compliance and commercial services.

At market close, the transport technology company's shares finished 2.21% down, to $6.20.

EROAD begins Share Purchase Plan offer

Investors are weighing down EROAD shares after the company's latest announcement to the ASX.

According to its release, EROAD commenced a NZ$16.1 million (A$15.19 million) non-underwritten SPP.

The SPP follows the company's NZ$64.4 million (A$60.77 million) placement to partly fund the acquisition of telematics provider Coretex. This consists of an upfront fee of NZ$157.7 million (A$148.71 million) and NZ$30.6 million (A$28.85 million) in contingent consideration payable in FY 2023.

EROAD management believes the takeover will be transformational, positioning it as a bigger player in the global telematics market.

The shares of the SPP will be issued at the lower of the price paid by investors in EROAD's recent placement. This is NZ$5.58 (A$5.26) per new ordinary share.

The company stated that up to $30,000 worth of shares can be applied for. However, it may accept oversubscriptions or scale back applications at its discretion based on the result of the SPP.

Settlement of the shares from the SPP is expected to occur on 13 August 2021.

About the EROAD share price

Over the last 12 months, EROAD shares pushed higher to reach an all-time high of $6.51 yesterday. This brings the share price gain for the period to around 56% and almost 33% higher for 2021.

At today's price, EROAD commands a market capitalisation of roughly $511 million, with approximately 81 million shares on its registry.

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At the time of writing, the transport technology company's shares are up 2% to $5.90.

Why was the EROAD share price in a trading halt?

The EROAD share price was placed in a trading halt on Wednesday so that it could launch an underwritten NZ$64.4 million conditional placement to partly fund an acquisition.

This morning the company revealed that the placement was successfully completed after receiving strong support from investors.

According to the release, the company has raised NZ$64.4 million at NZ$5.58 (A$5.25) per new share. This represents a 9.2% discount to the EROAD share price prior to its trading halt.

The company will now seek to raise a further NZ$16.1 million via a share purchase plan. This will be undertaken at the lower of the placement price or the five-day volume weighted average price prior to the closing date.

Why is EROAD raising funds?

EROAD is raising funds after entering into a conditional agreement to acquire 100% of Coretex Limited for NZ$157.7 million upfront and NZ$30.6 million in contingent consideration payable in FY 2023.

Coretex is a telematics vertical specialist provider delivering enterprise grade solutions. It is forecast to deliver annualised monthly recurring revenue (AMRR) of between $50-$53 million and EBITDA of $7-9 million in FY 2022.

Management believes the acquisition will be transformational for the company.

EROAD's Chief Executive Officer, Steven Newman, commented: "The acquisition of Coretex is truly transformational for EROAD. Accelerating our key growth metrics by two years in North America and Australia and positioning us to become a bigger player in the global telematics market. EROAD and Coretex both aspire to create a safer, more sustainable and more productive society. Combining EROAD's expertise in broadly adopted regulatory telematics solutions with Coretex's extensive vertical telematics expertise and products creates an advanced market fit."

The acquisition is expected to complete in the second half of FY 2022 and is subject to a number of conditions. This includes Commerce Commission clearance in relation to Coretex's New Zealand business, Overseas Investment Office approval, and EROAD shareholder approval.

The EROAD share price is now up 25% in 2021.

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The Eroad share price is currently stuck at $5.78 a share, right where it finished up yesterday afternoon. And that's where it's going to stay, at least for a while.

This morning, Eroad came out and told investors through an ASX release that its shares will be entering a trading halt. On both the New Zealand and ASX stock exchanges. Why? Here's some of what Eroad had to say:

We would like the trading halt to commence from the opening of trading on Wednesday 14 July 2021 and be lifted at the opening of trading on Thursday 15 July 2021. Or on any earlier announcement regarding the outcome of the capital raising discussed below…

EROAD is proposing to raise up to NZ$80.5 million of new capital by way of an NZ$64.4 million placement… followed by an NZ$16.1 million share purchase plan (SPP).

A new road for Eroad shares

So Eroad is conducting a concurrent share replacement and share purchase plan (SPP). What will it be spending this NZ$80.5 million on? Well, Eroad has also released another update on this subject this morning.

The company has told investors it has "entered into a conditional agreement to acquire 100% of Coretex Limited". Coretex is a "telematics vertical specialist provider delivering enterprise grade solutions".

This purchase will cost Eroad NZ$157.7 million in upfront consideration. Plus a further NZ$30.6 million if "certain performance milestones" are met. This share placement and SPP that was also announced today will partly fund this acquisition. That is, if shareholders vote in favour of the plan at the company's annual general meeting on 30 July.

The rest of the funding will come from the issuance of new shares (worth NZ$96 million). As well as NZ$11.8 million in cash from Eroad.

Why is the company buying Coretex?

So why is Eroad proposing to buy Coretex? The company listed a number of reasons:

• The Acquisition accelerates EROAD's key growth metrics by two years enabling it to capture the significant growth opportunity in North America and Australia
• The Acquisition drives synergies and accelerates revenue growth by adding new strategic verticals, providing broader product market fit and increasing customer base …
• Acquisition is accretive from an earnings basis in FY23, following growth investment in FY22 to drive synergies

And here's some of what Eroad CEO Steven Newman had to say on this proposal:

The acquisition of Coretex is truly transformational for EROAD…

EROAD and Coretex both aspire to create a safer, more sustainable and more productive society. Combining EROAD's expertise in broadly adopted regulatory telematics solutions with Coretex's extensive vertical telematics expertise and products creates an advanced market fit.

At the current (and frozen) Eroad share price, the company has a market capitalisation of $473.4 million, and a price-to-earnings (P/E) ratio of 228.

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At the time of writing, the transportation technology services company's shares up 0.5% to $5.26.

Why is the EROAD share price edging higher?

Investors have been buying the company's shares this morning following the release of its full year results.

According to the release, for the 12 months ended 31 March, EROAD reported a 13% increase in revenue to NZ$91.6 million and a 13% lift in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$30.7 million.

Management advised that this was driven by growth in contracted units across all its markets and a stable average SaaS monthly revenue per unit (ARPU) of NZ$58.30 per month.

At the end of the period, the company's Annualised Monthly Recurring Revenue metric (AMRR) had increased to NZ$88.4 million from NZ$84 million a year earlier.

EROAD's Chief Executive Officer, Steven Newman, said: "In a year that presented challenging macro-economic conditions we continued to grow across all of our markets delivering a 13% increase in revenue and Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) year on year. In addition, we accelerated our growth strategies to take better advantage of opportunities that have emerged from the challenges of the last twelve months. EROAD is now stronger than ever before, better positioned to capture the increasing growth opportunities in telematics."

Outlook

EROAD has reiterated the guidance it previously provided for FY 2022. Management explained: "It is anticipated that the percentage revenue growth in FY22 will strengthen from that delivered in FY21, but not be at the level experienced in FY20."

In New Zealand, the company expects to add a similar number of units to that seen prior to FY 2021 (~9,000 p.a). Its New Zealand Ehubo sales will be complemented with Clarity Dashcam sales.

Whereas in North America, EROAD expects increased unit growth in FY 2022 as the economy returns to pre-COVID conditions. This should be supported by Clarity Dashcam sales.

In Australia, it expects growth during the next two years to come predominantly from an Enterprise pipeline of 15,000 to 20,000 vehicles.

Finally, management advised that it continues to accelerate new product delivery for future growth in FY 2023 and FY 2024. This will see the company spend 24% to 27% of revenue on research and development during FY 2022. Positively, despite this, EROAD anticipates that its EBITDA margin will be maintained for FY 2022 and improve at the end of the financial year.

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At the time of writing, the transportation technology services company's shares are 1% to $4.77.

Why is the Eroad share price charging higher?

Investors have been buying Eroad shares this morning following the release of an update on its performance during the fourth quarter of FY 2021.

According to the release, the company sold 2,726 contracted units during the quarter. This includes 1,054 MYEROAD Clarity Dashcam units in March. Management notes that this reflects continued growth across its markets.

The majority of the company's new units were in the New Zealand market. Eroad added 2,295 units during the quarter in its home market after it secured a large New Zealand Enterprise customer, Toll New Zealand. This was supported by a 182 unit increase in North America and a 249 unit increase in Australia.

This left Eroad with a total of 126,203 contracted units at the end of the period.

Eroad guidance

Management also provided an update on its guidance for FY 2021 and FY 2022.

In respect to the former, Eroad continues to expect a small increase in second half revenue compared to the first half. Whereas EBITDA is anticipated to be similar to the first half's figure. This reflects the acceleration of product development and increased sales and marketing costs associated with the launches of key products.

Looking to FY 2022, Eroad anticipates that revenue growth will strengthen, but not be at the level experienced in FY 2020.

It commented: "In New Zealand, EROAD expects similar growth to the last four years. In North America, targeting an increased addressable market through improved product market fit, to deliver increased unit growth. In Australia, growth during the next 2 years will come predominantly from an Enterprise pipeline of 15-20,000 vehicles."

"As EROAD continues to accelerate new product delivery for future growth in FY23 and FY24, it anticipates spending 24-27% of revenue on R&D during FY22. However, the company anticipates EBITDA margin to be maintained but improving at the end of FY22, to provide further increased EBITDA margin."

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One of the declines on the ASX was the Flight Centre Travel Group Ltd (ASX: FLT) share price which fell 2.6% in reaction to the news that the Australian vaccination rollout was going to be delayed.

Here are some of the other highlights from the ASX today:

Air New Zealand Limited (ASX: AIZ)

The Air New Zealand share price went up 1.5% in reaction to the airline's update.

Air New Zealand is still looking to complete a capital raising.

The work continues to be informed by the evolving circumstances related to the global impact of the COVID-19 pandemic, including the government's announcement of the maintaining international air connectivity scheme, the March 2021 public announcements on vaccination programme timing, the potential implications for broader border re-openings, and the announcement of the quarantine-free travel bubble to commence on 19 April. All of these are fundamental to Air New Zealand's financial performance.

The company has changed its proposed capital raising target to be before 30 September 2021, not before 30 June 2021.

Air New Zealand has also renegotiated its existing lending facility with the government to ensure it has sufficient liquidity. It will increase the facility by up to $600 million in additional liquidity. This brings the total facility to $1.5 billion. The facility has been extended by another 16 months.

The company wasn't able to provide an updated cash burn update.

Perenti Global Ltd (ASX: PRN)

The Perenti Global share price went up today after confirming it received $80 million to date from the sale associated with the early exit of the Yanfolila Mine in Mali and Boungou contract in Burkina Faso.

From an operational perspective, the completion of the asset sale represents the successful exit from both projects.

As previously reported, the company expects to "liberate" $80 million to $90 million in cash from the sale of the mines, plus the remaining in-country plant, property and equipment and the settlement of outstanding working capital balances associated with the final close out of these two contracts.

Perenti managing director and CEO Mark Norwell said:

With the receipt of these funds, as outlined when we presented our 2021 half year results we will redeploy this capital across our business into our most value accretive opportunities as we seek to generate and maximise value for our shareholders.

Eroad Ltd (ASX: ERD)

The Eroad share price rose over 7% after announcing that it had signed its largest Australian customer, Ventia.

Ventia has entered into a five-year agreement for a monthly subscription of Eroad's software as a service (SaaS) products and intends to install approximately 2,500 Ehubo 2 devices in their Australian fleet with a further 1,500 in their New Zealand fleet. The agreement does not specify any minimum unit commitment. It is anticipated that these Ehubo units will be installed throughout the 2021 calendar year.

Eroad CEO Steven Newman said:

EROAD is pleased to announce that Ventia, an existing New Zealand customer for a number of years, has chosen to come on board as an Australian enterprise customer as well as significantly increasing the size of its New Zealand fleet utilising EROAD services. EROAD is looking forward to working in partnership with Ventia to deliver best safety outcomes.

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