As investors prepare for the worst amid expectations of potential interest rate hikes that could derail the momentum enjoyed by small cap stocks of late, an investment expert says quality opportunities remain regardless.
Mike Younger, Portfolio Manager at Prime Value Asset Management, said investors looking beyond the short-term rate hike buzz will find a “bigger picture opportunity” in value options, due to the attractive prices of “quality” small companies.
“We have seen a swift rotation in recent months from investors chasing growth at any price, to chasing more value-oriented names,” he said.
“There looks to be good buying opportunities among diverse, quality small cap stocks. Small cap profit growth has delivered such that the forward valuation multiple is not as stretched as some might perceive, with the Small Ordinaries index at c16x FY27 P/E.
“The question is whether this continues, particularly with the direction of interest rates being in flux. Rates don’t change the portfolio make-up too much for us.
“We continue focusing on companies that we see generating a minimum 10% IRR every year, and smaller companies provide greater opportunities to find these gems.
“There are currently opportunities to find higher quality industrial businesses that are growing earnings per share at more than 10 per cent per annum with share prices that are underperforming as investors chase resource stocks.”
Younger, whose remit includes the Prime Value Emerging Opportunities Fund and Prime Value Microcap Fund, said volatile conditions could even bode well for the active manager.
“Volatility can be an active manager’s best friend, providing dislocations between share prices and the underlying value of a company.
“For example, volatility in 2025 allowed us to add quality telco, TPG Telecom, to the fund, as well as trading around our position in Regis Healthcare.
“There’s a misconception that smaller stocks can be ‘boom-bust’, but with careful portfolio construction it’s possible to deliver consistently across cycles.”
Source: [Financial Newswire]