• Small caps poised for a rebound in 2025, says Shaw and Partners
  • Falling interest rates could boost small cap growth
  • Small caps offer better diversification and strong returns

 

Shaw and Partners’ 2024 stock picks have performed exceptionally well, with the investment advice and wealth management firm’s 10 emerging company selections up an average of 49%, highlighted by Metro Mining’s (ASX:MMI) standout 210% gain.

Wordpress Table Plugin

 

Looking ahead, Shaw and Partners is even more optimistic about 2025, predicting a strong rebound for ASX small-cap stocks.

With several key factors at play, the research firm believes 2025 could be the ideal time to invest in these often-overlooked opportunities.

One of the most compelling reasons to invest in small caps is their recent underperformance compared to large caps.

Over the past three years, small-cap stocks have lagged behind by 10% per year. This is an unusually large gap, especially when considering historical trends.

Shaw and Partners research analysts point out that such underperformance has often been followed by a swift rebound when market conditions improve, particularly when interest rates start to fall.

Smaller companies tend to be more reliant on external financing, so when interest rates fall, their borrowing costs decrease, giving them more room to expand.

“The relative performance can mean revert quickly given favourable fundamentals,” the wealth management firm explained.

“Over the past decade, there have been two periods of RBA interest rate cuts, each case resulting in Australian small cap stocks rising strongly and outperforming large caps.”

Another key reason to look at small caps right now is their superior growth potential.

Historically, small companies have outpaced large companies in earnings growth, as their smaller size allows them to grow faster from a smaller base.

“Equity markets look forward, and consensus estimates forecast stronger EPS growth for small caps relative to large caps as the economy normalises post-Covid,” Shaw and Partners said.

Small-cap stocks often have exposure to niche industries, which can lead to faster growth when conditions are right.

 

Diversification and upside

Small-cap stocks also provide greater diversification compared to large caps.

The biggest stock in the ASX 100, BHP (ASX:BHP), has a weighting of over 10%, which means its performance can dramatically impact the index.

On the other hand, the largest stock in the small-cap index is Life360 (ASX:360), which makes up just 1.6%.

This means small-cap investors can access a broader range of companies across sectors, from technology to consumer products, without being overly exposed to any one company.

“This diversification can help investors capture growth across a wider spectrum of the economy,” noted Shaw.

Also, the firm said that small-cap managers have consistently delivered strong returns.

The “median small-cap manager has outperformed their benchmark across 1, 3, 5, 10, and 15-year timeframes,” Shaw said, largely due to the inefficiencies in the small-cap market, such as lower liquidity and less analyst coverage.

This creates opportunities for active managers to generate ‘alpha’ – returns that exceed the market average.

Also, current valuations offer attractive entry points, particularly as small caps are trading on a 2-year forward price-to-earnings (P/E) ratio of 16.2, which is below the 17.9 P/E for large caps.

Historically, small caps have traded at a premium to large caps, so this discount could represent a solid buying opportunity.

 

 

Shaw and Partners’ Top 10 small cap ideas for 2025

As 2025 approaches, Shaw and Partners has selected its top 10 small-cap stocks to watch, and provided the following comments for each:

 

Amaero International (ASX:3DA) leads in metal additive manufacturing, targeting aerospace defence, and energy sectors. Leveraging advanced materials and strategic partnerships, it benefits from re-shoring trends and increased defence spending, driving significant growth opportunities.

Australian Vanadium (ASX:AVL) is developing an Australian battery industry utilising vanadium flow batteries that will be used for grid-scale storage. The energy transition requires both electricity generation and matched storage to balance the grid.

Beforepay Group (ASX:B4P) is now profitable with its core pay advance lending product. B4P is using its AI algorithms for two new businesses that can double revenue by (1) supplying larger/longer personal loans and (2) supplying AI credit risk modules to US financial institutions.

Bannerman Energy (ASX:BMN) is developing the Etango Uranium Project in Namibia. Etango is one of only a handful of construction ready uranium projects globally. It is a large (~215Mlb) and long life (~40 years) asset. The uranium price is expected to continue rising due to strong demand coupled with limited supply.

Chrysos Corporation’s (ASX:C79) proprietary photon assay technology is making mineral assays faster, more accurate and more environmentally friendly. C79 trades on FY25 EV (expected value) revenue multiple of 8.4x and we forecast a 3-year revenue CAGR (compound annual growth rate) of 46%. We see considerable upside as our $7.20 PT (price target) only assumes 265 terminal units vs a current TAM (total addressable market) of 610 units.

Humm (ASX:HUM) is a value investment emerging from restructuring and turning to growth. It is trading on a PE (price earnings) of 4x with earnings growth looking solid for FY25. It is Australia’s leading non-bank financial in secured asset lending to SME’s.

Metro Mining (ASX:MMI) ships bauxite to China and is trading at just 3.7x PE and 1.5x EV/EBITDA in 2025. Bauxite prices are rising due to strong demand from China at a time of supply disruptions in Guinea, China and an export ban from Indonesia.

Santana Minerals (ASX:SMI) is an advanced gold developer. The company is continuing to develop the 100% owned Bendigo-Ophir Gold Project in New Zealand that boasts 2.5Moz in resource. Shaw sees SMI rerate as it rapidly progresses to production whilst simultaneously continuing to explore its sizeable land package.

Silex Systems (ASX:SLX) has the potential to be a generational investment, Shaw says. Its technology is “likely to revolutionise the uranium enrichment industry”. There are positive catalysts in 2025 as the pilot plant proves up the technology, Cameco exercises its option to increase its stake in the joint venture and the US government provides financial support.

Southern Cross Electrical Engineering (ASX:SXE) is a leading national electrical, instrumentation, communications, and maintenance services group. SXE is exposed to the electrification and decarbonisation of the economy. We are attracted to SXE due to the quality of its management and the strength of its industry tailwinds.

 

 

The views, information, or opinions expressed in this article are solely those of the research firm and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article. 

Read MoreSmall Caps

Featured Companies

You might be interested in