Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 227

What’s driving the recent Small Ords surge?

The S&P/ASX Small Ordinaries Index (ASX Small Ords) has surged by over 10% in the last three months on a seemingly new upward trajectory despite what was a fairly mixed reporting season. For the month of October 2017 alone, the Index delivered a gain of 6%.

While the return looks impressive, closer analysis shows that this surge in the Small Ords has been led mainly by concept and momentum stocks, a rather narrow foundation. Leading the charge upwards has been the small cap resource sector, several technology stocks and ‘soft commodity’ plays with exposure to China. We refer to them as ‘concept ‘stocks.

The table below highlights the valuations, free cash flow produced as well as these concept stocks’ contribution to the Small Ords performance over the last three months.

Recent key movers on the S&P/ASX Small Ordinaries Index (Small Ords)

Based on share prices at 31 October 2017

Some interesting facts:

 

  • While the Small Ords Index was up 10.3% for the three months to 31 October 2017, these 13 stocks accounted for over half of that return.

 

 

  • This group accounts for $24.4 billion of market capitalisation. This market cap is expected to generate an aggregate of $571 million of reported profit in FY18e - on average a PE of over 40x forecast 2018 earnings and a forecast dividend yield of 1%.

 

 

  • In addition, these companies are expected to generate an aggregate Free Cash Flow of MINUS $76.6 million or a free cash yield of MINUS 0.3%.

 

 

What does this mean for the rest of the market and for prudent long-term investors?

It appears that in the current market, fundamentals have taken a back seat to momentum, unbounded optimism and the fear of missing out on the next big thing.

On the other hand, quality well-established companies that may have any sort of short-term earnings concerns are being sold down regardless of value. While this is creating great opportunities to buy quality stocks at attractive prices, it is hurting the performance of fundamentally based portfolios such as IML’s, particularly given our distinct preference for stocks that meet our quality and value criteria as opposed to concept type stocks.

In the table below are examples of long-established, good quality companies and their fundamentals. The share prices of these companies have actually gone backwards in the last three months.

Based on share prices at 31 October 2017

We believe investors should focus on the long term and not to get caught up the latest market fad, particularly at times like this when momentum and optimism has taken hold of some sections of the Australian sharemarket. By investing in companies that demonstrate strong competitive advantage, recurring revenues, with long term growing earnings and that are trading at reasonable prices, more consistent investment returns are expected over the longer term.

 

Anton Tagliaferro is Investment Director and Simon Conn is Senior Portfolio Manager at Investors Mutual Limited. This information is general in nature and has been prepared without taking into account of the objectives, financial situation or needs of any investor.

 

RELATED ARTICLES

Thinking small to win big

Why have small cap stocks underperformed?

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.