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Which small-cap stocks are investors buying?

Photo of Al Bentley, Simply Wall St By Al Bentley, Simply Wall St

min read

Three new companies join the 2017 list.

In a previous article for ASX Investor Update I used Simply Wall St portfolio data to look at the emerging stocks in which Australians were investing in 2016 and explained why they were outperforming.

Here I will review what has happened to those stocks and what new ones have catapulted themselves into the top 10.

The focus remains on emerging stocks outside the ASX 100 because they generally have less coverage from stockbroking analysts. This gives retail investors more opportunities to discover hidden gems before the market is aware of them.

(Editor's note: If you would like to trial the Simply Wall St software – ASX is offering players of our Sharemarket Game free access during the Game. Find out more about the Game and register).

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.)

Top 10 most popular small-cap stocks bought in 2017 (based on Simply Wall St user data)

Rank Ticker Name Industry
1 RFG Retail Food Group Retail
2 JIN Jumbo Interactive Gaming
3 ALU Altium Software
4 DTL Data#3 IT Consulting
5 RCG RCG Retail
6 MTR Mantra Group Hotels & Resorts
7 AYS Amaysim Australia Telecommunication
8 SHV Select Harvests Agrculture
9 IPH IPH Consulting services
10 SHM Shriro Holdings Household appliances

Source: Simply Wall Street

New members in the top 10

Jumbo Interactive (JIN)

Jumbo is a reseller of lottery games in Australia and operates ozlotteries.com, one of Australia’s largest e-commerce website retailing lotteries. With its share price surging by more than 60 per cent in the past 12 months, Jumbo has been in demand.

From a valuation perspective, Jumbo trades at a 30 per cent discount to its intrinsic value, according to our model, which implies it is undervalued. Jumbo’s price-earnings (PE) multiple of 16.8 times is lower than its peers.

See our full discounted cash flow calculation for JIN here.

RCG Corporation (RCG)

RCG owns and operates various footwear and apparel stores in Australia and New Zealand. Some of its more notable brands include The Athlete’s Foot, HYPE DC, Skechers and Vans. RCG’s share price has declined 55 per cent over the past 12 months.

In March, management cut its full-year earnings guidance from $90 million to $85–$88 million, citing tough trading conditions, which sent shares tumbling by 17 per cent. In April, RCG was affected by an industry-wide retail sell-off after Amazon officially announced it would launch in Australia.

Nonetheless, some RCG backers may believe that RCG’s strong stable of brands will be able to effectively defend against Amazon’s commoditised focus.

Analysts covering RCG are bullish on earnings growth

Amaysim (AYS)

The share price of Amaysim, a fast-growing mobile and broadband provider, has declined by 19 per cent over the past 12 months, but it has remained a popular stock among our users, perhaps attributable to the acquisition of Click Energy.

Following the announcement to acquire Click Energy in April, Amaysim’s price has remained relatively volatile. Nonetheless, the acquisition is generally perceived to be a positive step towards management’s goal of increasing Amaysim’s relevance in the Australian household.

In addition, Click Energy’s customer base is expected to expand under Amaysim’s leadership, given its reputation for customer service in the telecommunications industry.

Amaysim’s return on equity (87 per cent), return on assets (23 per cent) and return on capital (58 per cent) all above their respective industry averages.

Also, analysts estimate that earnings per share will grow by 36 per cent in the next year following the Click Energy acquisition.

AYS just started paying a dividend to its shareholders. Find out more here.

Stocks that graduated

Xero (XRO) and a2 Milk (A2M) were two popular stocks in 2016 that propelled themselves from the small-cap universe into the mid-cap section of ASX. XRO’s share-price performance was catalysed by reports in April that Technology Crossover Ventures, a highly regarded US venture capital firm, acquired a 1.3 per cent stake in Xero.

This was compounded by a strong FY17 earnings announcement in May as Xero became positive in operating cash flow after a solid second half.

Similarly, A2M’s share price surged after the March announcement that it would acquire an 8.2 per cent stake in Synlait Milk. The strengthened relationship between A2M and Synlait, a key manufacturing partner of A2M’s popular infant formula, is expected to provide medium-term certainty around A2M’s growth plans, especially as Chinese demand is expected to accelerate.

Management also lifted sales guidance in May and June following strong product demand, further lifting A2M’s share price to record levels.

Stocks that fell out of favour

Collection House (CLH), Blackmores (BKL) and Northern Star Resources (NST) were popular stocks in 2016 but fell out of favour with investors in 2017.

Collection House shares fell 13 per cent after the resignation of a board member, before rebounding by 10 per cent following management’s assurance that it would take a firmer approach with customers who refused to meet debt obligations.

Since a profit warning in August last year, Blackmores has failed to recover as investors have turned their backs on the vitamin and supplement manufacturer. With management citing softening Chinese demand in FY17 for its earnings downgrade, the stock has fallen off our list.

Finally, Northern Star fell out of favour with investors despite solid share price performance over the past 12 months.

Stocks that stayed

Retail Food Group (RFG) and Data#3 (DTL) are two stocks that have stayed popular since 2016. Overall, RFG delivered solid first half 2017 results, with revenue, underlying earnings and same-store sales exceeding analysts’ growth expectations.

Investors seemed initially nervous towards management’s commitment to an acquisitive growth strategy, but successful integration of newly acquired Hudson Pacific Corporation should ease these concerns. Data#3 also delivered a strong first half 2017 result, with earnings growing by 34 per cent, which met earlier guidance from management.

Do your research

Understanding what stocks are popular among other investors can be interesting and insightful when generating investment ideas for your portfolio, but you should always conduct your own research and verify your investment thesis with solid fundamental analysis.

Find further inspiration from our live list of “Solid Fundamentals” stocks here

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 150,000 users and covers five markets, including the US and UK. Simply Wall St is based in Sydney. The above graphics use data supplied by S&P Global Market Intelligence. All data at 24 August 2017.

Follow: @simplywallst   @Al__Bentley

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