'Upside surprise': 2 small-cap ASX shares ready to break out

The seas are rough, but Cyan's Dean Fergie reminds investors you need to hold on tight if you still believe it's an excellent business.

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It remains a nerve-wracking time for investors in small-cap ASX shares.

Inflation is still flying high, interest rates are still heading up, and there is still no certainty as to whether the world will avoid a recession.

But, according to small-cap specialist Cyan portfolio manager Dean Fergie, this is not the time to sell out of the little guys.

"Patience is always tested at times such as these but, each time in history, the market has improved, and disciplined investing has been rewarded accordingly," he said in a memo to clients.

"There is no silver bullet. But over time we think there is material upside in the portfolio and we, albeit somewhat impatiently, look forward to it being released."

In fact, now might be the best time to buy some of these unloved small caps, if the underlying business is sound and has great prospects.

Here are two ASX shares that Fergie's team is keeping the faith in:

Inside buying is always a good sign

Shares of hospital software provider Alcidion Group Ltd (ASX: ALC) have been absolutely punished this year, to the tune of 36%.

Just in April alone, the Alcidion share price tumbled a horrifying 22%.

Created with Highcharts 11.4.3Alcidion Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The Cyan team's frustration is palpable, as the market continues to ignore what it considers an outstanding business delivering a stream of good news. 

"The market dealt harshly with Alcidion's quarterly cash flow statement which came out on April 26, resulting in the stock trading down 20% in [the] last two days of the month," said Fergie.

"The reported numbers were reasonable, and even the outlook for the fourth quarter cash receipts is quite strong."

The catch was that management indicated there are some "delays in procurement outside of Alcidion's control" that may cause the company to miss its original plan of delivering positive earnings for this financial year.

However, the statement also read that Alcidion currently has "the strongest pipeline in our history" and that the outlook "remains positive".

"Indeed, two Alcidion directors have been buying shares in early May, which has provided some confidence and support to the stock in recent days."

Back on the way up?

Electronic games developer Playside Studios Ltd (ASX: PLY) has had a wild ride since listing on the ASX in December 2020.

From its debut closing price of 26 cents, the stock rocketed as high as $1.19 in February last year. Then it tumbled almost 70% to close Tuesday at 38 cents.

Created with Highcharts 11.4.3PlaySide Studios PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The Cyan analysts loved its latest update, though.

"Playside proved it is more than a work-for-hire game developer with a strong rebound in its quarterly cash flow statement, with the upside surprise delivered through its original IP division and strong revenue from its 'Dumb way to Die' franchise."

The full-year guidance showed "ongoing growth", which the market appreciated, to send Playside shares 6% up last month.

"After some disappointing news in recent months, which had resulted in a material share price decline, the market rewarded it for its improvement with some price strength which has continued into May."

Motley Fool contributor Tony Yoo 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 Alcidion Group. The Motley Fool Australia has recommended Alcidion 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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