There is a disconnect between underlying business performance and share price performance in some stocks, says experienced fund manager and small caps expert Dean Fergie of Cyan Investment Management.


How have small caps fared in this reporting season?

I think we are coming off the back of one of the most volatile earning seasons.

You don’t usually see so much polarity – but this time around there were some fantastic results and some that just failed to bring it home.

In the market lately, there has been a lot of greed and a lot of fear. We have seen plenty of people make money and most are optimistic that it will continue but everyone is a bit on tenterhooks.

While there’s hope that the market will continue to do well, investors are keeping quite close to the exits.

What is making investors so skittish?

My view that it has been probably better than it should have been for a long time – and I don’t know that it can continue.

I think there seems to be a lot of businesses that look to be on extended valuations. Some recent tech plays have fallen out but many more are still on big growth multiples.

If they don’t clear the high bars that they have set, they will be punished by investors.

In the small end of the market there is a lot of volume around, but there is a lot of movement and I’m not sure whether it has quite yet found its home.

All the easy money has been made in 2017 and 2015 and I think it will be harder to do so this year.

How would you describe the sentiment in the market at the moment?

A lot of investors invest just because the share price goes up – it’s a virtuous circle but at a certain point in time, a year after these businesses list, there has to be a judgement day.

Whether it’s profits, revenues or just the money in the bank – often the answer comes during this period.

In my opinion, there is currently a disconnect between the underlying performance of the business and the performance of the shares.

Those businesses will recouple when results come out.

What has contributed to a surge in over-valued companies?

I see it much the same as the hype around bitcoin or cryptocurrencies.

That way of thinking has pervaded into the stock market because there are a lot of people making lots of money – but at the end of the day they don’t know what they are buying.

It’s the true sign of irrationality – certain amount of it around at present.

Online forums have further added to it, where crowds so easily work each other up.

But it really is just like a day out at the races – you’re never going to boast about your losses.

What should investors be looking out for in company reports?

Standard price to earnings is a benchmark valuation point – the average would be about 20x but if you look at a stock like Kogan (ASX:KGN) the ratio is now as much as 50-60 times.

Their results came against a lot of people’s expectations and I think perhaps the market has kind of overestimated their long term potential.

As a fund, we tend to look at things like cash flow and reviews but I think if someone came to me with just a new business that I didn’t know of, I would evaluate first their market cap, revenues and underlying profitability.

Then if you track the trajectory of those numbers you can make an assessment as to their worth.

That is where crypto is ridiculous – it is not tangible, completely fictional and makes no earnings.

What does the half ahead have in store for us?

For the next few months, everyone is going to start raising money, at this time of year we often see quite a bit of corporate activity.

Newsflow other than that should be quiet up until April/May as everyone has released full year results and given guidance – you won’t see more hard numbers come out until the 4C cashflows.


Dean Fergie is the Director and Portfolio Manager for Cyan Investment Management.

Dean has more than 25 years experience in the funds management industry covering all major asset classes. Over the past 15 years he has specialised in small cap industrial ASX listed companies. He holds formal qualifications including Master of Applied Finance and Bachelor of Engineering (Civil). Dean has lectured for the Securities Institute of Australia and is a Graduate of the Australian Institute of Company Directors.