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Online retail stocks have become the small cap investment story of 2020, according to Todd Guyot, a portfolio manager with Regal’s $320m Australian Small Companies Fund.
“We have done well out of the whole online theme of late,” says Guyot, who will be tipping a stock at the fifth annual Sohn Hearts & Minds conference on Friday.
“We have done well out of (online homeware retailer) Temple & Webster and we have been early investors in things like Redbubble (an online market place for print-on-demand products).”
He is also watching as other online retail plays such as Booktopia and clothing company Universal Store look to list.
This year has seen a dramatic increase in online retailing as people have shopped from home as a result of COVID-19 restrictions, accelerating the growth of the sector in Australia.
“What was going to happen anyway over the next five years has probably been fast-tracked,” Guyot said in an interview with The Australian.
“People are using online during COVID as they don’t want to go to the shops.
“For some sectors of the market it has many years to play out.
“It doesn’t mean that (online retail stocks) will go up in a straight line. But in terms of a thematic over the next year, it is one that we still like and we would like to own over time.”
The Sohn conference, which features stock tips from leading fund managers, has raised more than $20m for medical charities in Australia since it began in 2016, inspired by a funds management-backed charity fundraising event launched in 1995.
Traditionally held in the Sydney Opera House, this year is the first time it has been held online because of COVID-19.
Established in 2015 by Phil King’s $2bn Regal Funds Management group, Guyot’s small cap fund has a broad remit that include online retailers, mining stocks, software and biotechs.
Its top five long holdings are BigTinCan, Nitro Software, Opthea, PointsBet and Spirit Telecom.
The fund has done well out of its investment in online bookmaker PointsBet, which announced a marketing and equity deal with US television giant NBCUniversal in August that resulted in NBC taking a 4.9 per cent stake in the company.
The deal resulted in the company’s share price, which was $2 on its listing in June last year, rising to $14 on the day of the announcement, boosting its market capitalisation to more than $2bn.
Guyot began covering small cap stocks when he joined AMP in 1993. Almost 30 years later, he has found the number of analysts covering small cap stocks in Australia has halved, as brokerages have reduced staff, while the opportunities to outperform the index with small cap investments in a top-heavy sharemarket have increased.
“It’s not uncommon to find companies whose share price can double in a day in the small cap space if they have a result which surprises the market,” Guyot says. “We set up the fund in February 2015 and it grew by more than 100 per cent in the first year.”
The fund has delivered an annualised return since inception of 28.6 per cent, compared with its benchmark (S&P/ASX Small Ordinaries Accumulation index) return of 8.4 per cent a year.
The fund only looks at listed companies with a market capitalisation of more than $300m (almost all of them ASX-listed except for a few New Zealand stocks) and with a turnover of more than $10m.
Guyot says his fund has no official investment style but looks for well priced companies with growth potential. “We like to find companies which are growing but, in trying to find that growth, we are looking at growth you can buy at a good price.”
He says the big investment opportunities are now in the small cap sector.
“The Australian market is very different to a lot of overseas equity markets, particularly the US market which is dominated in terms of market cap by technology companies,” he says.
“Our big stocks are pretty much banks, Telstra, Woolworths, Wesfarmers. If you want to get any growth you pretty much have to go into the mid cap and small cap space.
“We are believers that one of the biggest drivers of share prices over time is growth in earnings per share and free cashflow.
“To get that growth you have to come down to the small end.”
The small cap fund will not put more than 10 per cent of its portfolio into any one stock. It is 130 per cent long and 30 per cent short, keeping an eye out for potential shorts on companies that are set to underperform, including those with very stretched balance sheets. It has about 50-60 stocks in its portfolio on the long side and holds 15-20 companies it is shorting.
Guyot says with the reduction in the number of analysts covering small caps, there are more opportunities for the consensus forecasts to be wide of the mark and company performances to surprise the market.
This article was originally posted on The Australian here.
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