The ASX emerging companies index was up 8.9 per cent compared to just 1 per cent for the large caps for the September quarter, says Glennon Capital founder Michael Glennon.

You have always been active in the small cap space, how does the current small cap market stack up?

In the last few months so much life has come back into small caps, and there has been a lot of attention on it.

We had this weird 12 months after Trump came in, where people sold out of small caps to focus on larger stocks that might benefit from a potential increase in infrastructure expenditure but that’s been turned around.

Some of the large cap funds that were not traditionally owners of small caps are getting back in.

Micro and small cap indexes are now outperforming the large caps and momentum is coming back, for the September quarter the ASX emerging companies index was up 8.9 per cent compared to just 1 per cent for the large caps.

If you come back to the fundamentals, the outlook for big caps is quite benign. Would you really want to be buying into a bank right now?

What ares are promising in the small cap space?

The small cap rebound has come after the return of the small resources.

I don’t work much in the resource space but the benefit we get from the shoring up of commodity prices has been through our mining services stocks.

McMahon (ASX:MAH) and Emaco (ASX:EHL) were able to weather the downturn and now that things have turned around have been able to leverage their business models in mining services.

We’re more into big roll up and roll out companies. I don’t think it is wise to touch retail at the moment but companies like National Vet Care (ASX:NVC) and Paragon Care (ASX: PGC) are well-poised in industries that will always be in demand.

What sectors do you think are overvalued at present?

You get multiple expansions and contractions in the market and we’ve certainly seen that, where a lot of companies were downgraded — but that is behind us now.

That in itself provides us with opportunity. It has opened up potential because stocks were cheap and often oversold.

A stock like Shine Lawyers (ASX:SHJ) has had a lot of bad press because of a class action — and a decline in sentiment because of the fall of Slater and Gordon — but fundamentally isn’t performing too badly. If you look just at the cash flow, they are very strong and based on that the company is relatively cheap.

There are always these big bubbles in small caps. I think there is a bit of hot air around some of the technology stocks coming to market who don’t do a whole lot.

What advice do you have for investors interested in emerging ASX-listed companies?

My best advice is if you can’t understand a concept, don’t buy. You need to be able to understand what a business does, how it brings in revenue and what it is worth.

I like to think of it as — if the stock market crashed tomorrow and you had just one investment, how would you live. There are a lot of businesses who have listed and spent so much time trying to buy revenue but that’s not the best model.

I think the value in a small cap is simple. They have the potential to make you 200, 300 or 400 per cent and that’s something you could never get from a Rio or a BHP.

Small cap holders need to understand risk and reward, and believe that they can make money from investing. But it won’t happen overnight.

I think the average fund manager holds their stock for about six months, but the best returns come with time. You need to back a strong management team and give them enough time to get results.

 

Michael founded Glennon Capital to offer specialist small company investment management to high net worth individuals and family offices, as well as through selective platforms for clients with less than $1 million to invest in our portfolios.

GC1’s Initial Public Offering was completed in August 2015 and is now a listed investment company that is traded on the Australian Stock Exchange (ASX). We are proud to be recognised for co-investing with clients in all portfolios – an important feature which ensures that our values and principles are aligned with those of our clients.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.