Ten questions with Tom Fairchild, account Manager – Corporate Broking at Pac Partners

What small cap stock picks are you most proud of?

We had a lot of luck with a company called General Mining (ASX:GMM). It has now been taken over by Galaxy (ASX:GXY). We participated in a placement of 5c. That stock went to 65c and it has now gone to $1.60. That is lithium – another theme we like. A lot of people like to say they have lithium — but to actually get into mining, you need to be one of the very few who can raise the money to build the mine. Obviously, the CapEx of building a mine is hundreds of millions of dollars. This is one we picked early and our clients made good money. That was a listed one that many of your readers will know.

The two stocks that we’ve done that have performed very well are the Cann Group (ASX:CAN). That’s medicinal cannabis, and that has gone from 30c to $1.20 in four months. The second one is Bubs (ASX:BUB) – they do organic goat instant formula and they have gone from 10 cents to 60 cents. And we floated both those companies.

What do you look for when investing in a company?

The number one most important thing is the people. You are backing the people because the biggest risk is execution. They’ve got the idea, it may be working on a small scale, it needs to grow – can these people take it there from A to B? The second one is the product-market fit: Is it relevant? Does it work? Is it useful? And the third one is scalability. You’ve got to be able to scale without huge overhead.

What are the other key financials to study when considering small caps?

For me, two things. It’s revenue to your cost base — so you can’t have a big cash burn. There are companies out there that have got 50 people on their books and no revenue so the monthly bill is enormous. So, they have to have revenue that is growing with a low cost base. And then, the real metric that you can get excited about is the rate of growth. Companies will get a high premium if they are growing at greater than 50 per cent year on year. That’s the magic number at the moment in this market.

What market trends are you watching?

I think is SaaS [Software As A Service] is going to continue. Great companies at the moment in the listed space are zipMoney, GetSwift, Updater – these guys are growing fast, they are getting good names on their register. Top grade small-cap institutions are participating in the rounds – I think Westpac just backed zipMoney.  

I like the extension to SaaS, cloud computing. I think there are huge productivity gains that can be made at low cost. We are at a stage where technology is such that you don’t need to put more people on, you can just have the right software and just scale your business, which is a very powerful thing.

What is your outlook for the tech sector?

It is very exciting. It is ubiquitous really. There is software servicing all industries in some way. The fact that it can be hosted in the cloud means that servers are affordable, you don’t have huge Cap Ex spends, you can rent all this stuff and it is really going to drive productivity. While the employment landscape for people will need to change — and people will evolve — I think net net this is a very positive [trend].

What technologies will be important in the next 12 months?

We are already seeing the legal profession being disrupted. There is a lot of base contract law that software, embedded with AI (Artificial Intelligence), is driving at the moment. As these AI systems get another case and another case and another case — and this is across the board, but law is the first segment that is being disrupted — they are able to drive down the costs of basic contracts like employment or conveyancing. You are not having to pay a person a huge amount of money — you can just keep developing this software. It is real, it is happening now.

There is AI in sales too — a lot of cross-selling products and driving contextual advertising to your mobile. So lawyers and telemarketers are in trouble.

What’s a common mistake among investors when investing in small cap stocks?

Paying too much and again, I go back to the two things that drive markets – greed and fear. Greed can get involved and there is fear of missing out – things can get ahead of themselves. You need to have a good understanding of what the stocks worth so you have to have some fundamentals behind it otherwise you might just pay too much and then the market will fall away and you are left with a loss so that would be my answer to that – so paying too much and getting caught up in the hype of things.

 

Tom Fairchild is account manager, corporate broking at Pac Partners. Tom has 15 years experience in the financial services industry, with expertise in corporate finance and equities dealing for institutional and wholesale clients.

Prior to joining PAC Partners, Tom was an advisor at Phillip Capital for three years and spent four years as an Private Client Advisor at Patersons Securities.

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.