‘Ridiculous selling’: Small cap fund managers on buying the panic and where the bargains are
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Dean Fergie, is the co-founder of Melbourne-based Cyan Investment, where his 25 years in funds management across all major asset classes is poured into one single fund.
Dean has absolutely no intention of being all things to all people.
“We reckon you should do one thing and do it well. As such we run just one fund, and invest (long only) in ASX listed small capitalisation companies,” he says.
“We choose who we want to work with and we like to deal face to face with our investors and put in the time. Which means regular investment reporting and high liquidity monthly unit pricing, applications and redemptions.”
Perth-based Alto was founded in 2004, and is an independent investment and advisory firm.
Tony has a pretty obvious passion for building businesses and inspiring start-ups. For many a moon, he’s been busy helping list private companies on the ASX, completing capital raisings – for both private and public firms – as well as providing analysis and commentary on the corners of the market he loves.
To celebrate the end of fiscal miserable, the gents took time out of their ludicrous schedules to team up with Oriel Morrison to chat small cap Armageddon and how to buy your way out of the end of the world. The conference and full interview can be viewed here.
Here are a few of the paraphrased highlights.
Dean Fergie: “I think it’s a combination of things but broadly it’s been an unwinding of valuations that got fairly toppy but have been driven for a long time now by low interest rates and a lot of investor enthusiasm.
“I think we’ve seen retail investors retreat from the market, a little bit of insto (institutional) selling – maybe just a reallocation – and then that’s sort of snowballed into the fact that we’ve had six months of some pretty serious falls.
“From my perspective, it looks like it might be close to over but it’s been pretty brutal but then again, it was very, very enthusiastic on the way up so it seems to me the trend line is still broadly flat or even slightly up over the last 10 years.”
Tony Locantro: “I actually told my clients that we needed to cue the Benny Hill theme song: it’s just been the most ridiculous selling I’ve ever seen in quality small caps.
“So what we’ve had is a combination of tax-loss selling which has sparked further selling and then it only takes a handful of shareholders per stock to absolutely kill sentiment. For the moment the selling is continuing – I’ve never seen sentiment this bad in small caps.
“But what I’m telling my clients is it’s like buying beachfront property 20 years ago; Some of the mining stocks are outstanding bargains. so if you can stomach this volatility and not cave in I think this is a great buying opportunity.
“We are charging into some of these small caps right now – and I should make it quite clear, Oriel, that I’m into the stocks we can call the real toddlers of the small caps sector. I’m a student of the companies that many people won’t know about until hopefully they suddenly know all about them.
“So looking at earnings valuations and intrinsic value it doesn’t really affect what I’m doing; I’m just looking for the companies that I believe will grow into bigger ones.
“Based on this weakness we’re buying as much as we can, realising that there is going to be volatility. When you see the Dow Jones down just thousands, we know that a small portion of shareholders are gonna panic and they always provide the opportunity.”
Dean: “I am. If you want to look at true value – Touch Ventures (ASX:TVL) – this is just outstanding and we believe it’s the venture capitalist investment company that’s been backed perfectly and it’s share price has been a very poor performer. It floated at $0.40 and is currently trading at 11 cents.
“The fact is you look through the numbers they’ve got heaps of cash, an outstanding balance sheet – actual money in the bank – and they’ve also got listed and unlisted investments. Currently, their book is at something like $120 million. So if you can buy into this business at 11 cents… I mean that’s true value.
“The fact is that they’re doing a buy back at the moment so it kind of says obviously to me that the company believes in the value there and – you know you never wanna say there’s no downside but there’s almost no downside.”
Raiz Invest (ASX:RZI) is an Aussie financial technology firm with interest in Australia, Indo and Malaysia. The brainchild of George Lucas, it’s a micro investing platform and we’ve seen across the board that they had a lot of leverage here in in a bear market that, especially, these fund managers get hit by.
“Look at the Platinums, the Pinnacles, the Magellans – but Raiz has been caught up in that negativity towards the sector, but again it is showing remarkable value as an investment.
“It’s got something like $70 million in cash on the balance sheet, is capped at less than $60m but has 300,000 active customers in Australia, over a billion dollars in funds under management… so for us, a business like that, you know it’s attractive.
“I think it’s got great merit standing alone on its own, but it’s also a fantastic acquisition opportunity I would have thought.”
“Alcidion (ASX:ALC) is a hospital software business. They’ve got global reach now.
“They’ve got really strong business in both the UK, Australia and NZ and over the last three or four months announced six new contracts or contracts extensions to government hospital organisations, where they’re doing something like $40 million in actual revenue.
“Alcidion is almost profitable, they’ve got a nice amount of money on the balance sheet, circa $16 million – and we think business like this – a global defensive software business in the healthcare space – offers outstanding value.”
Tony: “I quite like the gold sector and the biotechs. I mean, the Australian gold price has been holding around $2600 for some time and what we are trying to focus on is the exploration stories, and based on, you know, we’ve seen this success in DeGrey (ASX:DEG) especially, so I’m focused on company’s like PacGold (ASX:PGO).
“They’re trading at $0.57. They’re drilling the Alice River Gold project in North Queensland. They’ve had outstanding success already.
“Biotech’s been absolutely decimated and that stems from the NASDAQ and the biotech index in the US – we’re buying Nyrada (ASX:NYR).
“They’re trading at 13 cents. The company’s got a cholesterol inhibitor drug which is due to go into the clinic this year and they’ve also got a tie-in with the Walter Reed military institute in the US for a traumatic brain injury drug.
“They have a world class board relative to this sector, with Christopher Cox who was on the Medicines Company – another cholesterol firm which got taken over for about $9 billion…
“This stock was trading a low 20s now down to 13. It is a serious buy.”
Dean Fergie and Tony Locantro were interviewed by Stockhead for the Small Cap Showcase. The conference and full interview can be found here.
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.
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