Fundies name the small caps to watch in FY24

Unloved small-cap stocks in the consumer finance, funds management, retail, and software sectors are best placed to recover from an interest rate beating in the new financial year, according to some of Australia’s top small-cap stock pickers.

‘Absolutely hammered’

Mr Allingham argued some fintech lenders are cheap for those investors prepared to take more risk.

Over 2022-23, the listed consumer and small business lenders and buy now pay later players including MoneyMe, Liberty Financial, Pepper Money, Wisr, Zip, Sezzle, and Plenti morphed from market darlings to pariahs as funding costs surged and investors panicked over the prospect of bad debts wrecking balance sheets.

Steve Johnson, a stock picker and founder of Forager Funds Management, said small-caps carry more risk than established blue-chips, but also the potential for higher returns.

“We’re picking over retail, fund managers, and financials that have been absolutely hammered at the smaller end,” he said. “We don’t necessarily need a market recovery, there’s enough interesting valuations out there to make money out of stock-specific valuations.”

Mr Johnson’s Forager Australian Shares Fund owns positions in whipsawed software players RPM Global, ReadyTech and Whispir, alongside junior consumer lenders Wisr and Plenti, which have crashed 50 per cent and 47.8 per cent over the past year.

“People are worried about the bad debts environment,” he said. “But Wisr and Plenti have been good at passing through rising funding costs to clients, both have come out and said they’re profitable. But the bad debts could wipe them out if it gets ugly, so both are extremely high-risk and high-reward.

“[ASX-listed lender] MoneyMe is even riskier. The difference there is the credit profile of the end customers, Plenti and Wisr claim they’re lending to prime borrowers, but we’ll see if that’s the case or not. MoneyMe is lending at higher rates to people at the forefront of interest rate pain.”

Humm not mentioned