10 ASX small caps that could "bounce" by the end of the year: Shaw & Partners
Broker Shaw and Partners has just published new analysis examining the fortunes of the ASX-listed small caps and the resources sector, and concludes that both have been savagely oversold over the past two months.
They note in their report published on 29 October that the S&P/ASX200 Resource Index (ASX: XJR) is down 17%, the S&P/ASX Small Ordinaries Index (ASX: XSO) is down 12%, and the S&P/ASX 300 Resources Index (ASX: XKR) is down 19%.
And the broker has a theory as to why.
Shaw & Partners said:
In our view, the reasons for the sell-off are due to rising energy costs, higher inflation, rising bond yields and wobbles in the AI trade. However, the sell-off has been indiscriminate, and commodity prices are holding up (particularly copper) so stocks with positive catalysts before the end of year could quickly recover ground.
Disconnect between share prices and commodities
On the resources front, Shaw & Partners noted that resource stocks had gone backwards over the past two months, despite commodities except for iron ore being either flat or up.
They said it was an "unusual sell off" given the relative strength in commodity markets.
The broker added:
Copper is close to its record high, Newcastle coal is up roughly 40% this year and the term uranium price is at a record high. The sell off has been driven by rising yields and risk-off sentiment, not a commodity bust. It is going to be crucial to watch the copper market in coming weeks. If copper holds onto its gains, then we should expect resource equities to bounce.
Shaw & Partners surmised that copper stocks had been sold off along with AI stocks, as they were seen as a key supplier to data centre builders.
They said:
When the AI infrastructure trade wobbled, that momentum money left the resource sector too.
On the small-cap resources front, Shaw & Partners said these stocks were sold down because they were sensitive to funding risks and could struggle to raise capital, and with no cash flow, were sensitive to interest rate increases.
The broker said small caps were often sold off in a "risk off" market, and the retail squeeze from cost-of-living pressures was impacting many consumer-focused companies.
But Shaw & Partners argued that the sell-off may now be over, and it could be time to buy.
Firstly, we are now probably towards the end of the rate rise cycle. The RBA is hiking into rising unemployment, which historically signals peak rates are near. When yields roll over, the longest-duration assets rebound hardest, and that means small cap stocks. Secondly, the sell-off has disconnected equities from commodity prices – copper in particular remains strong, but gold is holding above US$4,000/oz despite rising yields, coal prices are heading higher, uranium is strengthening, and most base metals remain up ytd. Despite higher costs, the cash generation in the resource sector is strong, and if equity markets don't value assets, then it is likely that corporates will.
Shaw & Partners' 10 stock ideas
Benz Mining Corp (ASX: BNZ) – the company is "unusually" advanced on permitting and is expected to publish a maiden resource early next year.
COG Financial Services Ltd (ASX: COG) – COG is trading below its peers, while Shaw is predicting double-digit net profit growth for the next three years.
Elementos Ltd (ASX: ELT) – tight global tin supply supports the fundamentals of this company, which is expecting its final environmental approval for mining early next year.
Gentrack Group Ltd (ASX: GTK) – slower than expected contract wins have pushed the share price down, but Shaw says the fundamentals of the business are sound.
ikeGPS Group Ltd (ASX: IKE) – the company has three new products on track for launch this year, while Shaw sees potential for recurring revenue to exceed expectations.
IPD Group Ltd (ASX: IPG) – Shaw said the company is exposed to multiple tailwinds, including electrification, electric vehicle infrastructure, and data centres.
Metro Mining Ltd (ASX: MMI) – shares were heavily sold off after the company missed guidance, but Shaw said the company remains cash flow positive with a good balance sheet.
Paladin Energy Ltd (ASX: PDN) – Paladin is down 17% year-to-date despite a rising uranium price, progress at Patterson Lake South, strong performance from Langer Heinrich and a highly positive outlook for the uranium sector.
Sky Metals Ltd (ASX: SKY) – Shaw argues the market is underestimating the value of the company's Tallebung tin project in New South Wales.
Waratah Minerals Ltd (ASX: WTM) – this company is expected to publish a maiden gold resource early next year, and ongoing drilling could provide further upside.
The post 10 ASX small caps that could "bounce" by the end of the year: Shaw & Partners appeared first on The Motley Fool Australia.
Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Gentrack Group, Ipd Group, and ikeGPS Group. The Motley Fool Australia has positions in and has recommended Ipd Group. The Motley Fool Australia has recommended Gentrack Group and ikeGPS Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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