Luke Winchester

CIO, Merewether Capital

The big question: Will 2024 be the year of micro and small caps?

“At the risk of being a barber telling someone they need a haircut,” Winchester genuinely thinks so.

It’s been a tough run. From early 2022 until today the ASX Emerging Companies index has underperformed the ASX 200 index by nearly -30%.

But as they say, when the US sneezes the world catches a cold – and right now though the US is a picture of rude, if somewhat unkempt, health. Since November, the Russell 2000 has put on more than 20%, “almost impossible to conceive of only a month or two ago”, Winchester tells Stockhead.

“Meanwhile, here at the sleepy ASX – investors haven’t quite caught up.”

So we might suffer the “higher for longer” narrative a bit more yet, but the green shoots can be seen in the uptick of “a booming M&A market among micro and small caps”, Winchester says.

These are the three stocks Winchester’s watching right now:

Compumedics (ASX:CMP – 0.27c, MC $47.8m): A manufacturer of brain imaging and sleep diagnostic medical equipment which Winchester describes as “a quiet achiever over many decades”.

Unfortunately for shareholders, CMP has struggled to crack larger addressable markets… but Winchester notes “great signs” that may be changing.

It’s in the process of commercialising its next-gen sleep monitoring product Somfit, which also has the all-important FDA approval and comes with a salesforce and inventory to hit the ground running.

CMP’s also got a new product in the form of a brain scanner that tracks direct brain activity and can be used to diagnose and track brain diseases such as epilepsy, Alzheimer’s, Parkinson’s, autism and schizophrenia.

“The business looks set to have a bumper FY24 with 1Q24 revenue up 115% compared to last year,” Winchester says. “It’s guiding towards $5m EBITDA in FY24, about 10x the current $48m market capitalisation, a very reasonable price for a global medical equipment business with two emerging growth markets gaining serious traction.”

Kip McGrath Education Centres (ASX:KME – 0.46c, MC $26m): “I just couldn’t help myself and bought a bit more Kip McGrath Education Centres (KME) last week when it slid below 45c,” Winchester says. “At the current market capitalisation of $26m, 13x net profit is too cheap in my opinion for the growth potential on offer.”

It’s all about the trying to crack the US. Through their Tutorfly brand, KME is positioning themselves to work under a $28bn funding program allocated to eliminate the ‘learning loss’ experienced through Covid restrictions. KME has contracts with 14 school districts, up from three last year and over $3m in contracted revenue for this year.

Atlas Pearls (ASX:ATP – 0.16, $68.5m): Up 300% since the end of August yet “still screamingly cheap”, says Winchester. But also not one for faint-hearted.

It’s enjoying a run of increased demand from Japan and China but the big catalyst are supply issues primarily from a disease affecting Japanese pearls.

“ATP is in the right place at the right time,” Winchester says. “Their production is remaining steady around 600k pearls a year, but they are seeing a near tripling of their sale price from $37 at the start of last to year to over $100 now.”

Risks? Geopolitical – production is in the South Sea, Indonesia. And it’s a luxury item.

Winchester prefers to focus on the fact a special dividend this year looks “locked in”… and Kim Kardashian choosing pearls for this year’s Met Gala.
 

Jon Mills

Equity analyst, Morningstar

Mills has just released his Q4 overview of the mining industry and it’s a story of strong China steel production driving iron ore and metallurgical coal prices up, while base metals prices sagged on worries of a Western recession.

He’s got four picks, including Newmont Corporation (“undervalued given its weak sales volumes in the first nine months of 2023”), South32 (“undemanding valuation metrics, diversified portfolio of future-facing commodities and strong balance sheet”) and Iluka Resources (“longer-term, maturing mines and a lack of large, high-grade, undeveloped resources are likely to support mineral sands prices”).

The bad news for climate-concerned fans is if you’re looking for fair value, you might have to wait for a bit because Mills’ standout pick is “materially undervalued” Whitehaven Coal (ASX:WHC – $7.36, MC $6.16bn).

WHC is still enjoying the benefits of above-average thermal coal prices and has agreed to buy two metallurgical coal mines from BHP. Mills notes that will “diversify its production to roughly half thermal coal, half metallurgical coal, while the debt taken on to help finance the purchase is manageable”.

Those ESG concerns? Exactly what will restrain supply and therefore support prices.

“Whitehaven is well-placed to benefit from continued strong demand for high-quality thermal coal over at least the next decade.”

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.