ICE Investors has shone a spotlight on the performance of small cap companies since the beginning of the COVID-19 pandemic, many of which had emerged “largely unscathed” according to the firm.
In terms of earnings per share growth, ICE Investors managing director Callum Burns said Australian small caps had outperformed some of their larger counterparts during the past 12 to 18 months, as was previously seen with small cap franchise businesses following the GFC.
“We’re seeing a similar trend with COVID; franchise companies have used the uncertainty to their advantage and have come out the other side in good shape,” said Mr Burns.
“These companies have often got more certain earnings growth and, provided investors paid the right price for the shares, they can deliver superior shareholder returns.”
Small cap stocks tracked by the S&P/ASX Small Ordinaries index have risen 15.27 per cent year-to-date according to S&P Dow Jones Indices, outperforming the S&P/ASX 200 which has risen 14.10 per cent.
Temple & Webster was provided as an example of a small cap that had responded well to the impacts of COVID-19.
“Its market share is now bigger than pre-COVID; it’s increased its brand recognition among existing and prospective clients; it has excellent management, which was evident pre-COVID but is now proven beyond a doubt; and its logistics expertise has improved substantially over the past 12-18 months,” said Mr Burns.
“It’s a company that is in a substantially better position than prior to the onset of the pandemic.”
Mr Burns said that ICE Investors was expecting a substantial earnings rebound for Australian companies next financial year due to the depressed earnings brought on by the pandemic.
“This doesn’t necessarily mean they’ll return to pre-COVID levels, but the percentage increase will look large even though their dollar value may not be that great,” he said.
Quality businesses with sustainable growth and a durable competitive advantage were identified as major focuses for ICE Investors during portfolio construction.
“A key measure for us is, if these companies were to put their prices up, what would happen? If the answer is “nothing”, that tells you there’s something special that ties the customer or user to that particular business, and price isn’t an issue,” said Mr Burns.
“They’ve got a moat around them, making it very difficult for other companies to come in and take their revenue and they are managed in such a way that the product or service is sticky with the client.”
