2023 review & 2024 opportunities
Includes:
Review of my 2023 performance- winners & losers
Lessons from 2023
Opportunities I’m seeing going into 2024
After a challenging 24 months for small caps, it was good to see both the Asx Small Ords and Russell 2000 indices rally some 15% and 22% in the final months of 2023. On the back of this rally, my portfolio finished up 21.8% for the calendar year.
2023 Review
Winners
My biggest winners of the year in order of dollar gain were:
SGI.AX(+70%), VHT.AX (+52%), LOV.AX (+30%), DDR.AX (+46%), GOOGL (+58%) and DSE.AX (+20.3%) - links are to my write-ups on these companies.
SGI.AX was the largest contributor to my gains. Making up ~10% of my portfolio SGI gained 70% throughout the year and while I did average up it’s a position I should have gone a lot harder at.
VHT.AX was pure luck receiving a takeover at a ~50% premium. It was a company I had hoped to hold for a number of years and given the strong competitive advantages and tailwinds, thought it had the ability to produce some nice long-term returns.
LOV.AX- Lovisa is a large position of mine, with an amazing management team, long runway for growth and strong competitive position I am looking forward to hopefully holding onto a long-term compounder. Given the growth and discretionary nature Lovisa will continue to be volatile, opening up the opportunity to hopefully purchase shares opportunistically. While it finished the year up some 40% I won't be counting my chickens just yet as I’m sure it will come back down to earth.
I’ve written about Both DDR.AX and DSE.AX throughout the last year. DDR’s recovery in margins has helped trigger a nice 50% rally, a movement that happened far quicker than I expected given the growth profile. DSE.AX rallied well towards the end of the year and while I believe it has the potential for some nice longer-term returns the rally was on the back of the broader market.
Smaller positions VYS.AX and DUR.AX finished up 34% and 40% respectively, two positions in hindsight I should have gone a lot harder at. My small weighting were on the back of existing heavy exposure to business dependent on mining and CapEx cycles, and I didn’t want to get caught if the tide went out. However, especially in the case of VYS it was a missed opportunity not having an earlier look after its earnings upgrades.
Losers
My main detractors in order of monetary losses were KME.AX (-24.7%), AVA.AX (-20.04%) and DMP.AX (-14.27%). I originally bought DMP through the back end of 2022 and after suffering some losses I doubled down at the start of the year. While I can’t fault the quality of management or the business’s track record, I question it going forward, DMP faces structural challenges regarding store expansion and margins and I consequently sold out after their full-year results.
KME.AX is a business I have written about before. For a relatively mundane business, its been a wild 2023 and going forward I think they have the potential to see some nice top-line growth along with significant margin expansion- as long as they execute! KME is the business that has kept me up at night the most, the opportunity exists if you are able to be patient while they transition their business model however I’m not 100% sold on their ability to execute and don’t want to give management a too long of a leash.
AVA.AX- Not too much to say about Ava, after a year of strong sales growth and no movement in the share price it fell 20% in the final months on the back of no real news. There were a few minor contract announcements which I suspect spooked the market given their minor nature. Why I do like the business’s growth potential I question its profitability potential given the one-off nature of revenue.
Lessons
Bet big on your best ideas
“You should remember that good ideas are rare— when the odds are greatly in your favour, bet heavily”- Charlie Munger
SGI- was a really good idea, with vast upside and very little downside it was a severely probable and asymmetrical bet IMO. It has to be said nothing fundamental has changed since the rally and has all been driven by multiple expansion. I didn’t think it would run away as quickly as it did on the back of no news, and in review it was probably worth 15-25% of my portfolio not 10.
Be opportunistic
A tactic I’ve adopted throughout the year is buying small and often. While some situations require you to act quickly, nibbling at positions week to week has allowed me to act less emotionally while opening up the ability to pick up shares opportunistically when volatility assists.
Profitable
I’ve stolen this chart from @Quant_Kurtis on Twitter, across 24 years of data, small/ micro caps with positive FCF have returned 16% p.a while small-caps with negative FCF have returned 0% p.a.
While the vast majority of the companies I own are profitable this study highlights how much easier it is investing in profitable small caps. It goes without saying the key benefits of investing in profitable businesses is the downside protection from insolvency, capital raising and valuations through earnings and dividends.
I do think investors can be too negative about unprofitability and capital raisings, if a business is able to generate high returns on capital raise away IMO, but unfortunately, most unprofitable companies don’t generate high returns but continue to dilute anyway.
Endowment
After having a good think at the back end of the year I cut a few weeds which I probably should have done a while ago. They were very small positions which helped me rationalise holding them. They were far from executing and the only reason I continued to hold them was the endowment effect, there was no chance of me buying more, and no reason to continue to hold.
Opportunities for 2024
I thought I would share a few opportunities I’m seeing in the small-cap space going into 2024
NZM.AX- High-quality business trading at a cyclically low PE 9x on cyclically low earnings
NZME maintain the largest market share in both its newspaper and Radio divisions throughout NZ. The story is NZM’s publishing division (The New Zealand Herald) is transitioning from physical to digital. The decline in Physical sales is being offset by digital growth while the radio division is also digitalising to podcasts. Advertising accounts for 64% of revenue however tough economic conditions have resulted in a slight decline. Going forward the opportunity presents itself to buy a business boasting incredibly strong brands and market reach for a PE of <9x on cyclically low earnings while receiving a yield of 6%+.
CLG.AX- Packaging and recycling business trading at 7x earnings
CLG is a global packaging producer and recycler of electronics. The business has obvious tailwinds and is well-placed going forward with improved product offerings and scale on the back of several acquisitions. They have been able to acquire these businesses for <10x earnings mostly through debt allowing for non-dilutive accretive acquisitions that will pay back the interest themselves. CLG is trading at 7x earnings (assuming management guidance) with a long steady runway for growth with high inside ownership.
NASDAQ: SMTI US Medtech company- 50% revenue CAGR in the last 3 years
Sanara has one of the most high-quality board/ management teams you’ll see in the global small-cap space and after growing revenues from $15m in 2020 to ~$60m in 2023 they are looking to create an ecosystem of wound care solutions around their core product Cellerate. With gross margins of 90%, rapidly growing hospital approvals and a likely transition to profitability Sanara is poised well for 2024 and beyond.
CHL.AZ - Airbnb for campervans- 75% organic growth in 2023
Camplify is Australia and NZ’s largest 2-sided marketplace for campervans while maintaining the 2nd largest network in Europe. They boasted strong growth of 75% (organic) in 2023 which should only continue going forward as they increase their market penetration and geographical footprint. CHL trades at a very reasonable 4x sales relative to the potential of the business.
CMD.AX- Probable lawsuit against the Ghanan government with 3-20x upside.
This isn’t for the faint-hearted. Long story short, an unlicensed Chinese miner has been profitable mining gold from land in which CMD held a licence since 2016. CMD is undertaking an international arbitration claim of no less than US$275m for the breach of this contract against the Ghanan government. CMD has a very strong case and evidence, however only trades at a market cap of AU$19m. The severe mispricing not only creates vast upside in the chance they win but as certain developments unfold which the market clearly hasn’t priced in such as litigation funding, and arbitration developments ect.