MoneyTalks: Ugly Duckling stocks to keep you warm for when the Black Swan drops by

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Mark Gardner at Maqro Capital one of Australia’s leading investment research, trading and advisory firms

Don’t let fear hold you back – Super Coach Phil Gould

Take it away, Mark.

“I’m giving our team a bit of a plug first, because they’re not only legends, but the weirder it gets out there, the more investors need a full-spectrum service like ours that I reckon is quite unlike anything currently around in the Australian financial services field. We’re a fintech company and we aim to provide a seamless experience for all our diversified clients, from identifying opportunities through to executing the trade.

“That said, we don’t place much stock in the click hungry warblings of the financial press (current company excluded, of course) because right now, the major media are currently stuck on a constant negative news cycle making it all too easy for the regular investor to get caught up in the doom and gloom of that persistently hawkish Fed message that rates are going higher, faster and longer, lingering inflation and the impending doom of a fed-induced recession.

“While these messages may prove correct, this perspective is certainly not a new one, in fact, it is likely to be the most common sentence written about markets in the last six months by a long margin.

“Equity, bond and currency markets all sit at multi-decade record levels of one sort or another and the prolonged volatility and hyperbolic predictions that are normally reserved for ‘black swan’ events, are not a surprise, so it is time to switch off your CNBC, Bloomberg or nightly finance news update, get some perspective and go looking for undervalued diamonds in the rough

“In times of peak fear, we forget some of the world’s most successful companies were born out of turbulent economic periods. Walmart in ’62, Apple and Microsoft were born in garages around the 1975 recession, Dell during the inflation-induced ’80s recession, while Tesla and Facebook were founded at the bottom of the market in the aftermath of the tech bubble bursting.

“The key is to focus on the need for the product, service or innovation rather than the macro picture. Take out inflation, Ukraine, the UK circus, rising interest rates and three economic cycles economists feel the need to forward predict (with an endless list of conditional ‘what ifs’); in summary, shut out the noise and get back to basics, what companies and sectors will outperform but have been sold with the run-of-the-mill index companies.

“A few obvious thematics are climate change and energy, others are less obvious like medicine and tech.

“So here’s just three diamonds in the rough, largely dismissed amid overwhelmingly negative market sentiment, but worth getting to know…”

Tech

A good mantra for hard times: The first-to-market advantage is always good; a borderline monopoly is even better.

Clever local audiovisual innovator, Audinate Group (ASX:AD8), has the latter.

Its Dante networking protocol is so far ahead that its competitors are slowly giving up and becoming customers, with 14x the market adoption than its closest competitor.

The company was hit by the pandemic period with Dante’s use for live concerts falling off a cliff. However, the company spent the lockdown time well, developing new products and vertically integrating hardware into its offerings.

The audio visual networking company generated a 46% increase on its revenue to US$7.6 million for the quarter. It was a record quarter for the business despite factory closures in both Malaysia and China. AD8 also said demand for its Dante products continues to reach record highs, with the backlog of orders for chips, cards and modules amounting to US$14.8 million at the end of the quarter.

The addressable market is north of $1B and sales revenue is strongly trending upwards. With margins of 75% EPS is expected to go positive in the next 1-2 years.

Energy transition

Black Rock Mining (ASX:BKT) – readers of Stockhead, being both smart and attractive, would already be keen accolytes of Reuben and his team of West Coast wonder nuts and therefore overly familiar with the lithium space, so we don’t need to go there, other than to say lithium isn’t the only material involved in battery production.

Most lithium-ion batteries actually contain more graphite than lithium and natural graphite, which due to its density, holds energy better than synthetic graphite, and will be in significant structural deficit for the foreseeable future. Benchmark Mineral Intelligence expects worldwide graphite production will need to at least double inside 2-3 years to just meet surging demand from EV automakers. Pricing is also forecast to nearly double between 2017 and 2027

Black Rock mining, based in Tanzania, is one of the miners in pole position to take advantage of this. Only a year away from production, a 26-year mine life, 80% offtake agreements and final debt financing for mine construction due soon, BKT is well placed to profit from the energy transition.

The mining exploration co has a 100% interest in the Mahenge Graphite Project, which is one of the largest JORC-compliant flake graphite resources in the world.

Black Rock Mining’s Definitive Feasibility Study for the project demonstrated that it could produce “industry-leading” graphite of up to 99 per cent concentrate and that it could maintain that quality of graphite for 31 years. It’s also announced the largest offtake deal of any graphite developer in Heilongjiang Bohao, one of China’s biggest vertically integrated graphite processors.

Medical innovation

Polynovo (ASX:PNV) – Medical innovations are firmly in the category of necessities. However, the sub-sector is fraught with danger with promises of FDA approvals and revolutionary drugs, not to mention the personal emotional triggers of wanting these medical innovations to happen.

Taking this minefield into account, you want to play it smart and not get in too early as your money can sit dormant for years until any result materialises while you get diluted by cap raises. One I think is in the sweet spot between, FDA approved and in the early stages of going to market, is Polynovo.

The company’s first product, Novosorb BTM, a synthetic skin/bandage for burns patients, which surgeons say improves consistency of outcomes and reduces complexity of treatment at a low cost, is starting to gain traction. Its initial launch was derailed by COVID, preventing its salespeople entering US hospitals. In addition, there’s the recent approval of a second complementary product, Novosorb MTX, which offers more specific wound management for complex structures such as bone and tendon, ulcers and surgeries.

This increases PNV’s addressable market by $500m and diversifies product risk.

To be realistic, you are likely to wear some pain on your selections so dollar averaging over the next 3-6 month period is likely your best play while market negativity is rife. Split the amount you want to invest into 3-4 tranches, and buy in regular intervals or pick a few levels to place bids.

This information in this article are the opinions of the author and are general information only, without regard to any investor’s individual objectives, financial situation or needs. It is not specific advice for any particular investor.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.