Best small cap stocks: June 2020

About the author:

Andrew Tang
Author name:
By Andrew Tang
Job title:
Analyst - Equity Strategy
Date posted:
01 June 2020, 12:00 PM
Sectors Covered:
Equity Strategy and Quant

The ASX Small Ordinaries index has rebounded an impressive 37% since the 23 March low putting it just 15% short of the 20 February high. Two factors have supported the resilience of ASX Small Ordinaries index.

  • First, sectors like Information Technology (55% since 23 March) and Consumer Discretionary (37% since 23 March) held up best through and exiting the lockdown period. The two sectors represent a much larger share of the Small Ords than the large cap ASX 50. By contrast, Energy and Financial firms, which have been hit extremely hard by the crisis, have a much smaller weight in the index. Given their size and exposure, small caps typically have a superior growth advantage 
  • Second, unprecedented support by central banks and governments has reduced the risk that the pandemic triggers another financial crisis (a possibility that loomed large back in March). And expectations that monetary policy will be kept extremely loose for years to come has pushed discount rates lower than ever – the 10-year US Treasury yield is about 0.70% – which in turn means that the sustainable level of valuation has risen.

With all this in mind, at some point valuations will have the last say, and as we have highlighted before, they are sitting at extremely elevated levels, so we strongly suggest a cautious and targeted exposure to the market.

We do think a catalyst such as a jump in the number of high profile corporate defaults, spillover from the China and US trade dispute or the risk of a second wave of COVID-19 infections could deflate investor optimism very quickly.

But assuming that the virus outbreak is brought under control in the coming months, and the economy continues to re-open according to plan, we would not be surprised to see the index advance a bit further in the short term.

Small cap ideas

We update our key small-cap stocks below. One of the great attractions of small cap investing is that they remain below the radar of most investors.

There is often very little research coverage of smaller companies and this lack of coverage can create inefficiencies in the stock valuation and therefore pricing - potentially allowing investors to generate an information edge.

Top picks

  • Superloop (SLC)
  • Collins Foods (CKF)
  • Adairs (ADH)
  • Bapcor (BAP)
  • Shine Justice (SHJ)
  • Senex (SXY)
  • Credit Corp (CCP)
  • Mainstream (MAI)
  • Mitchell Services (MSV)
  • Volpara (VHT)
  • Mach7 Technologies (M7T)
  • PWR (PWH)
  • APN Conv. Retail REIT (AQR)

Please contact your Morgans adviser for more information on each stock mentioned above and to discuss whether they’re suitable for your investment portfolio.

More information

Contact your nearest Morgans office to find out more.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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