Top small-cap stocks Australians are buying – and why
Simply Wall Street users’ three most-bought stocks on a quarterly basis for 2016.
In my previous ASX Investor Update article I used Simply Wall St data to look at what stocks Australians were investing in the most over a three-month period. Here I take it a step further and look at what has been bought over the year so far and what has been happening with those companies in that time.
The focus is on small-cap stocks outside the ASX 100 because these typically are less covered by stockbroking analysts. Below are our users’ three most-bought stocks on a quarterly basis for 2016 so far:
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).
2016 Q1: January to March
Note: Average return is based on the average buy price during that period and the current price at the time of writing (24 October 2016). Source: Simply Wall St
Debt collection and receivables management specialist, Collection House, was the most bought company in the first quarter of 2016.
In less than a month from mid-February, when it announced a 26 per cent drop in earnings during the half-year to December 2015, its shares plunged nearly 60 per cent. Investors jumped in to snap up a bargain in one of the top dividend payers. Those who bought on the dip are sitting on hefty profits. The shares currently trade near $1.30, a recovery of more than 30 per cent from the 52-week low of $0.93 in April.
Apart from capital appreciation so far, the stock’s 6 per cent dividend yield and an acceptable price-earnings (PE) ratio of 9.5 times attracted investors.
The printed circuit board (PCB) design software company, Altium, was the second most popular stock on our users’ shopping list during the start of 2016.
There were two significant events that most likely caused investors to buy. First, the encouraging first-half performance with 22 per cent sales growth and 13 per cent revenue growth. This solid track record was maintained in the full-year results announcement in August, leading to a 25 per cent increase in the share price and, I imagine, many happy investors who decided to buy the stock earlier in the year.
The second event was Altium signing an agreement with Dassault Systems. The agreement means Altium’s PCB design software will be integrated into Dassault’s popular SOLIDWORKS CAD software.
With an impressive 13 per cent annual growth rate for the past five years, mostly coming out of the US, Altium appears to be on track to hit its $100 million revenue target for 2017.
The first quarter of 2016 was tough for shareholders in Xero, an online accounting platforms provider to small businesses, as they watched their holdings drop in value by almost 30 per cent. This did, however, present an opportunity to new investors who believe in the business and the opportunity for cloud accounting.
The company also announced a key partnership with Google allowing customers to export Xero data directly into Google Apps such as Sheets, a free cloud-based competitor to Microsoft Excel.
Although still loss-making, the company announced impressive growth metrics with an 81 per cent increase in subscriptions globally, mostly in Australia.
2016 Q2: April to June
Top three buys of Q2 2016
Retail Food Group
Retail Food Group now has a network of more than 2,500 outlets worldwide. In 2015 the business acquired coffee chain Gloria Jean’s, which nearly doubled its revenue. Apart from acquiring a key player catering to Australians’ ever-rising craving for coffee, the group’s joint venture with GouBuLi, an up and coming Chinese restaurant chain, seems to have lured a lot of investors after the stock ended nearly 20 per cent lower in 2015.
Investors were clearly impressed with Retail Food Group’s first-half results, which included a 27 per cent increase in underlying net profit and a 13 per cent dividend-rise.
Along with an improving outlook, back then the stock paid nearly 5 per cent in dividends (now 4.2 per cent) which may have been a bonus in disguise for investors as the company achieved this by returning about half its earnings to shareholders. The stock has traded at a PE ratio of around 20 times for most of the year.
Northern Star Resources
A drop in the gold price in the second quarter affected the share price of many gold miners, including Northern Star. Investors close to the stock saw this as an opportunity to get in on a company with robust margins and attractive fundamentals. Northern Star is one of the lowest-cost gold producers in the industry and has grown its earnings at an impressive year-over-year average rate of about 40 per cent.
Analysts are bullish on the company, which currently has three producing sites and one expected to come online in 2017.
Amid serious quality concerns related to domestic producers, the large and growing market for Australian natural health products in Asia, mainly China, presents a massive opportunity for three of the companies mentioned in this article.
The second quarter was important for Bellamy’s and others, with the Chinese Government adding one of their main products (infant formula) to the list of products that could be imported free of tax.
Being the largest infant formula producer in Australia, it is not surprising that Bellamy’s was third on the Simply Wall St users’ most bought list in the second quarter of 2016. The stock also joined the S&P/ASX 200 in March, which may have also raised awareness with self-directed investors. Over the past five years, Bellamy’s shares are up 840 per cent, while its revenue has grown from $13.4 million to $244.6 million.
2016 Q3: July to September
Top three buys in Q3 2016
An established player in vitamins and dietary supplements, but a newcomer to the infant formula party, Blackmores doubled net profit in the financial year to June 2016 (FY16). However, investors were spooked by the weaker outlook for the first half of FY17, which sent shares down more than 25 per cent from their August highs.
This presented an opportunity to buy into a company that has sustained an average annual earnings growth of 20 per cent over the past five years.
The tide has still not turned for the investors who made it the third quarter’s best-bought stock according to Simply Wall St. Blackmores, which replaced Spotless Group in the S&P/ASX 100 index in July, currently trades at a PE ratio of 19.8 times.
Shares of tech solutions provider, Data#3, gradually increased almost 60 per cent during the first two months of the third quarter, followed by a 20 per cent correction in September.
However, they have recovered the lost ground since. The uptrend, which kicked off in May, got some serious lift after the company announced in July that it expected a 25 per cent increase in net profit for its upcoming FY16 results.
This was verified in August when the full-year results were released, sending prices up another 10 per cent. The company also appeals to income investors by paying out a significant portion of its earnings as a dividend; shareholders who bought in this period will be receiving a yield above 5 per cent.
Investor optimism also stems from the fact that Data#3 is now transforming into a product and services company – a business model more focused on recurring revenues – from its product-centric approach earlier.
The a2 Milk Company
FY16 was a big year for the specialist milk producer, which more than doubled its revenue over the year. This was predominantly from a significant increase in infant formula sales in Australia and abroad. The growth in China and South-East Asia was the key behind the substantial buying; a2M’s revenue climbed almost tenfold in the region.
The stock was bought heavily by our users throughout the year, but especially in Q3 following its blockbuster financial results reported in August (a2M recorded 127.4 per cent growth in sales). The stock was included in the S&P/ASX 200 in June this year.
The Infant Formula Portfolio
If you want to see how a portfolio of all these companies looks today, I have created it in Simply Wall St and named it the Infant Formula Portfolio. View it here.
Looking at the portfolio analysis in more detail:
- The average PE ratio is 24 times and it looks undervalued based on a discounted cash flow analysis.
- On average, analysts expect 30 per cent growth in earnings next year.
- Seven of the nine companies are in the portfolio dividend payers, which would surprise a non-Australian investor, who would expect earnings in such businesses to be reinvested rather than paid to shareholders.
The Infant Formula Portfolio. Source Simply Wall St.
About the author
Al Bentley is CEO and founder of Simply Wall St. Its aim is to help people become better investors by turning complicated financial data into easy-to-understand infographics. The platform has more than 45,000 users and covers US, UK and Australian markets. Simply Wall St is based in Sydney. The above graphics use data supplied by S&P Global Market Intelligence. Figures quoted are from the week beginning July 18, 2016. The portfolio of stocks discussed in this article is available here. Follow: @simplywallst
Al Bentley is CEO and founder of Simply Wall St. Its aim is to help people become better investors by turning complicated financial data into easy-to-understand infographics. The platform has more than 45,000 users and covers US, UK and Australian markets. Simply Wall St is based in Sydney.
The above graphics use data supplied by S&P Global Market Intelligence. Figures quoted are from the week beginning July 18, 2016. The portfolio of stocks discussed in this article is available here.
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