Tru Datt: It's a pretty good time to call yourself an ASX small cap

Welcome to Tru Datt, a Stockhead exclusive featuring the insights and opportunities as per Emanuel Datt – founder and chief investment officer at Datt Capital – a Melbourne-based investment manager focused on identifying growth and special situation investments.

The US small cap sector might offer greater depth and diversity, but Australian small caps present distinct advantages for investors seeking value and growth, according to the crew at Datt Capital.

Emanuel says the inefficiencies and relative under-coverage of the Australian market create fertile ground for identifying overlooked gems and undervalued assets.

But can Aussie small caps punch above their weight, more so than their weightier American brethren?

The Russell 2000 is the most common index for US small caps and comprises America’s top small-cap stocks by market capitalisation.

It provides 10 times the number of companies relative to the Australian small cap index, the S&P/ASX Small Ordinaries (XSO).

“Of course, US small caps are larger in size than Australian companies. The average market cap of a US small cap is $6.3 billion, which is clearly enormous compared to an average Australian small cap market capitalisation of $840 million,” Datt says.

This means the US market is undeniably deeper and more mature compared to its Australian counterpart, with that depth reflected in the number of available investment opportunities and the overall liquidity of the US small cap equities market.

In contrast, Datt points out that the Australian small cap market remains under-researched.

“This inefficiency can present unique opportunities for astute investors to uncover undervalued assets and generate outsized returns.”

“The Australian market is considerably cheaper than the US market on a relative basis,” Datt tells Stockhead. “Valuation differentials between the two markets are quite apparent, with Australian equities trading at more attractive multiples compared to their US counterparts.

“This affordability could appeal to investors seeking exposure to high-growth companies at more accessible entry points.”

Bright lights

“Australian small caps present opportunities for growth, particularly in emerging industries like technology, healthcare, and renewable energy. These sectors may offer significant growth potential for investors seeking exposure to innovative companies.

“Whilst the US small cap sector is expected to the benefits from an ongoing economic recovery, improving economic fundamentals across our local economy could support the performance of Australian small cap companies.

“Continued innovation and investment in these sectors from both private and public investors could drive growth opportunities for small cap companies with unique business models and products.”

Three ASX small caps to watch

Clarity Pharmaceuticals (ASX:CU6)

Clarity Pharmaceuticals (CU6) is in the biotech sector.

“Clarity is a clinical stage radiopharmaceutical company developing next-generation products to address the growing need for better diagnostics and treatments in oncology.

“The company has a number of novel products currently going through a range of clinical trials, each which could materially augment the value proposition in the case of success. The company recently completed a $120 million capital raise, providing sufficient funding to support its commercialisation efforts.”

LGI (ASX:LGI)

LGI (ASX:LGI) is a renewable energy and carbon abatement company which specialises on the capture and beneficial use of biogas and offers a full suite of services.

Emanual says LGI – in the local renewables space – is already an established domestic leader in the complex recovery of biogas from landfill, and subsequent conversion into renewable electricity and saleable environmental products.

“The company is incrementally deploying its technology over a number of landfill sites throughout Australia and should benefit from projected higher electricity prices along the eastern seaboard over time.”

Superloop (ASX:SLC)

Superloop (SLC) is in the local IT and telco space.

SLC is the country’s challenger telco and internet service provider.

Emanual says the takeover target enables challenger retail brands to take a larger share of the market, leveraging its Infrastructure-on-Demand platform. These offerings leverage Superloop’s investments in physical infrastructure assets that include fibre, subsea cables and fixed wireless, as well as Superloop’s software platforms. It provides connectivity and services in three segments of market being consumer, business and wholesale.

“The company benefits from its ownership of fibre network infrastructure which holds latent value as its utilisation increases. The company has been subject to M&A interest of late from larger telcos, and we anticipate that this may continue given the strategically valuable nature of its assets.”

Emanuel Datt is the founder and chief investment officer at Datt Capital.

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.