3 Battered ASX Small Cap Stocks We Still Support: Expert

3 Battered ASX Small Cap Stocks We Still Support: Expert

It’s been a tough year for investors in ASX small-cap stocks.

“All types of investing require nerve and courage. But maybe no more than small-cap stocks,” Ophir analysts said in a memo to investors this month.

“When an economic downturn hits, small caps tend to fall first and furthest.”

In times of volatility and uncertainty, the value of smaller companies falls much more than larger companies for a number of reasons.

“Small caps also tend to be more sensitive to changes in the economy. They are less able to diversify their operations and less likely to have the large cash reserves needed to withstand difficult trading conditions.”

You can also get caught in a liquidity spiral. In a falling market, institutional investors often sell smaller holdings first to avoid getting into an illiquid position.

“They then also stop buying and push prices further and faster down with even less liquidity,” reads Ophir’s investment strategy memo.

“And while small-cap managers may still see cheaper stocks, many are unwilling to enter the market, so small-cap stock prices are falling at an accelerating rate.”

But the reward for sticking with the small fish is that they recover much faster than large caps on the other side.

“Historically, in the 12 months after the U.S. small-cap index bottomed around a recession, they’ve averaged a staggering 70% return — that’s 11% more than large caps,” it says Memo from Ophir.

“The small-cap rebound is also fast. Most of the additional yield advantage over large caps has accrued in the first three months.”

As a reminder, here are three ASX small-cap stocks that the Cyan C3G Fund is sticking with despite suffering absolute pressure last month:

Rock solid investments for the inevitable small-cap recovery

tea Mighty Craft Ltd (ASX:MCL) The stock price fell more than 21% in September, but the Cyan team is not concerned.

“The alcohol industry is dominated globally by a handful of powerful players, but the domestic industry has grown significantly in recent years,” Cyan’s memo to customers read.

“We think it’s a sector worth investing in and Mighty Craft is our preferred business model where they acquire and accelerate growing beer and spirits brands by providing capital, distribution and retail and wholesale locations. “

Given the nature of the industry, Mighty Craft could become an attractive acquisition target.

“The successful domestic companies or alcohol brands will inevitably be acquired when they achieve a reasonable market share or are on a clear path to gain a reasonable market share.”

Video game developer in Melbourne playside studios ltd (ASX:PLY) is another small-cap cyan that has analyst support despite a 14.3% valuation drop over the past month.

“This gaming business continues to impress with the execution of its growth strategy through a business model based on contract labor, development of original intellectual property and new initiatives such as a third-party publishing division,” Cyan’s memo read.

“In short, an exceptional team with a strong and growing business in a strong and growing industry.”

The deep discounting of its stock means it’s another potential takeover target.

“We believe Playside can deliver great returns to shareholders independently or in a timely manner as an M&A target (hopefully both),” Cyan portfolio managers said.

“We see this as a unique opportunity to participate in this momentum in the ASX-listed space.”

The Cyan team has long been a fan of the hospital software maker Alcidion Group Ltd (ASX:ALC).

This has not changed despite a price drop of 12.1% in September.

“Alcidion is building a strong position in the digitization of hospital management systems, both administrative and clinical, in Australia and the much larger UK market.”

The company had revenue of $34 million in fiscal 2022. Revenue for the June quarter increased 46% year over year.

“The company has worked hard to become a leader and the timing looks perfect to scale the business significantly over the next two years as governments accelerate the push towards healthcare technology in a post-COVID drive the environment forward.”

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