Panicked investors are overlooking strong investment ideas as concerns about inflation, interest rates and war in Europe reach fever-pitch, says Perennial Partners’ Andrew Smith.

Mr Smith, Perennial’s head of smaller companies and microcaps, said many of the smaller stocks on the ASX have been hard-hit in the recent sell-off, with those not yet cash flow positive the worst affected.

“About 80% to 90% of our portfolio, they’re already cash flow positive, they’ve got strong cash balance sheets, so obviously if any of them have been hit in this sell-off we think that’s completely unwarranted,” he said.

“There is a portion of our portfolio who have been the hardest hit, who are not cash flow positive now but we have them forecast to be in 12-18 months.”

Mr Smith said in many cases this sell-off is also unwarranted, highlighting Dr Care Anywhere (ASX: DOC) as one example of a company that has dropped by more than half since hitting $0.63 in January. 

These losses come despite the business issuing guidance in late February that the company will be cash flow and EBITDA positive in the first half of 2023.

“Those sort of catalysts we think at the moment are being ignored,” Mr Smith said.

“There’s a bit of an opportunity in those stocks that turn the corner from a cash flow point of view, that are getting close to cash flow positive and EBITDA positive, and the markets are treating them like any other loss-making company.

“It’s been quite extreme, the sell-off at that end, and that’s where I’m seeing the most opportunities. We’re really adding to our positions at the moment in this weakness.”

Cash flow is one of the first screens Mr Smith applies when looking for new investment opportunities, with only those already positive or set to become so in 12-18 months considered for his portfolio.

Mr Smith said he and his team undertake an arduous research process that includes looking at any structural issues (positive or negative) in the industry a company operates within, then the balance sheet strength of a business, underlying margins and the team’s forecast versus market expectations. 

Importantly, Mr Smith said, the fund may wait for months after identifying a ‘buy’ before actually purchasing as they continue to build conviction or wait for enough liquidity and a more attractive entry point.

Join Andrew Smith this Friday, 25th March, at 12pm (AEDT) on our weekly The Insider: Meet the Fund Manager webcast to hear him talk about his favourite stocks, investment strategy, market insights and more. There will also be an opportunity to ask questions during the session. To book yourself in, click here.

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position

Sources

• ASX, DOCTOR CARE ANYWHERE GROUP PLC
• Doctor Care Anywhere, FY21 Preliminary Results and Capital Raising