These are Ned Bell’s favourite global small caps
Small and mid cap stocks are a strong buy, just not the ones in Australia.
Bell Asset Management chief investment officer Ned Bell and senior global equities analyst Joel Connell say there are a lot of opportunities in global small and mid caps but the Australian equivalents are “extremely expensive”.
They have been using the volatility in global markets to buy a series of companies with an average market cap around $US14bn ($19.6bn), a figure that in Australia would be a solid large cap, but which they call a “SMID”, a small to mid cap.
“As we move through the COVID-19 crisis, when things start to calm down a bit … we will see a rerating and that gap will close,” Bell said during a webinar last week, referring to the sizeable discount in share prices among global small caps.
He says SMIDs have gone sideways for between two and five years and valuations are now back to where they were in October 2017.
“There’s no need to go dumpster diving in the value end because those companies are very challenged and that’s not going to change any time soon,” he said.
“You’ve not missed the boat [in terms of finding good companies at good prices].”
He views hiccups in upcoming earnings and further volatility as buying opportunities in a series of companies, including Danish diagnostics device company Ambu, US supermarket chain Kroger, cloud business Arista and UK property website rightmove.
These have all been chosen for having a strong balance sheet and sustainable profitability.
Bell is watching for an “eye opener” earnings season which he says is likely to be “confronting”.
He’s expecting subdued commentary around the reopening of the US economy, given how much it is currently struggling with renewed outbreaks of the pandemic, cost management initiatives in the form of layoffs, and some downgrades for the coming year.
Unsurprisingly, health is a big feature in the Bell portfolio, with the sector making up about 20 per cent of the total.
Connell said COVID-19 is pushing R&D spending by pharmaceutical and biotech companies.
Icon Plc and Charles River Laboratories are on Connell’s radar. As contract research organisations (CRO) they handle preclinical drug discovery and clinical trial work for biotechs.
He expects a strong rebound in clinical trial activity once global studies restart, given the June quarter saw the highest ever funding levels directed towards the biotech space.
He is picking Idexx Labs as a play on the animal health theme — particularly as COVID-19 has driven people around the world to pet ownership — and Align Technologies to attack the dental market, which Connell says has a strong balance sheet and should have a strong rebound next year.
The Danish device company Ambu is a favourite, as it’s benefiting from increased short-term demand for its single use endoscopes.
Around 100 million endoscopic procedures — those that allow doctors to look inside the body — are done each year around the world and most are done using reusable endoscopes. The risk if not cleaned properly is infection and a potential law suit.