The small side of the market has been a relative underperformer in recent years.
While this is disappointing, the team at Bell Potter believes that the tide is about to turn and is urging investors to start buying small caps. It said:
Small caps are well-placed to outperform over the next year. Small caps have underperformed their large cap counterparts since the end of 2021.
A rapid tightening cycle from central banks, a slowing economy and elevated risks of a hard landing have all been headwinds for small caps in Australia and globally.
The tide is turning for small caps as the headwinds experienced over the past three years begin to turn. In our view, this is an opportune time to rotate portfolios towards small caps due to a confluence of favourable factors.
Which small-cap ASX shares are buys? Let's take a look at three that Bell Potter is bullish on.
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DroneShield Ltd (ASX: DRO)
According to Bell Potter, the first small-cap ASX share to buy is counter-drone technology company DroneShield. The broker has a buy rating and a $1.35 price target on its shares.
Bell Potter is very positive about the company's growth outlook, particularly given its massive sales pipeline. It said:
DRO is an Australian defence manufacturer specialising in counter-drone technology. Increased geopolitical tensions in the aftermath of the Russia/Ukraine conflict and the Middle East have led to a global surge in defence spending.
As a result, the defence industry, including companies like DRO, is witnessing significant growth and increased demand for their products and services. DRO has demonstrated strong earnings momentum, with CY23 revenue ($55.1m) increasing +228% YoY.
We believe this momentum is likely to continue in CY24 based on a $28m contracted order backlog and $1.1b sales pipeline.
IPD Group Ltd (ASX: IPG)
Another small-cap ASX share that the broker is bullish on is IPD Group. It is an electrical equipment and technology distributor. Bell Potter has a buy rating and a $6.00 price target on its shares.
The broker believes IPD is well-positioned for growth due to electrification trends. It said:
IPD Group distributes electrical equipment and technologies that support energy efficiency in building, infrastructure, and process sectors.
Demand for upgrades in existing infrastructure and the scaling of IPG's EV charging business should drive future revenue and market share expansion. The group is well-positioned to capitalise on electrification trends in energy and transportation to support earnings growth.
Universal Store Holdings Ltd (ASX: UNI)
Bell Potter thinks that this youth fashion retailer is a small-cap ASX share to buy. It has a buy rating and $7.80 price target on its shares.
The broker believes Universal Store can grow its earnings in the double-digits through to at least 2027. It said:
Universal Store Holdings (UNI) is a leading youth focused apparel, footwear and accessories retailer in Australia. UNI will continue to increase store numbers over the next few years, supporting earnings growth of 12% p.a. over (FY25- 27).
Valuation looks attractive, trading on a fwd P/E of ~14x. UNI is a quality small cap (ROE ~25%) that is executing on its rollout strategy.
