4 ASX small caps to back in a market that's looking away

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TL;DR

Sebastian Evans sees emerging companies as undervalued opportunities due to less institutional interest.

Key Insights

Naos Asset Management focuses on investing in emerging companies, often founder-led and operating in unique industries.

XRF Scientific, with a market cap of $200 million, manufactures equipment for mineral analysis and has never issued a share since listing.

Somnamed offers a non-invasive oral device for sleep apnea, growing revenue annually for a decade despite profitability challenges.

Maxi Parts benefits from the increasing freight movement in Australia, distributing aftermarket truck parts with a record profit last year.

Sebastian Evans emphasizes the importance of an owner's mindset and investing in quality businesses over liquidity concerns.

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Deep Dive

Naos Asset Management's Approach

Sebastian Evans, from Naos Asset Management, explains their focus on emerging companies, often founder-led and in unique industries. He emphasizes the 'law of small numbers,' where small companies can grow significantly. Naos invests in these businesses for their potential to compound capital over the long term. Evans highlights the unique industry exposure and the importance of an owner's mindset, looking for leaders making decisions for the long-term benefit rather than short-term gains.

Concentrated Portfolio Strategy

Evans discusses Naos's concentrated portfolio approach, with each listed investment company (LIC) holding only 12 core investments. He argues for quality over quantity, enabled by their closed pool of capital structure, which allows them to focus on the best businesses regardless of liquidity. This strategy reflects their belief in the long-term value of owning quality businesses, even if they are not highly liquid, countering the trend of passive investing driven by liquidity.

Top Stock Picks and Market Opportunities

Evans shares insights on three unique stocks: XRF Scientific, Somnamed, and Maxi Parts. XRF Scientific, with a $200 million market cap, is known for its mineral analysis equipment and hasn't issued new shares since listing. Somnamed offers a non-invasive sleep apnea solution, growing revenue for 10 years. Maxi Parts capitalizes on Australia's growing freight movement, distributing aftermarket truck parts. Evans also mentions Move Logistics, a small-cap logistics company in New Zealand, as an undervalued opportunity with high risk.

Takeaways

✓Consider investing in emerging companies for unique industry exposure.
✓Focus on founder-led businesses with long-term growth potential.
✓Evaluate liquidity needs against asset class before investing.

Key moments

1:18Why emerging companies

“It's easy to make something small become larger and compounded at a reasonable rate in theory.”

5:37XRF Scientific overview

“XRF Scientific manufactures equipment used in analyzing minerals, with a market cap of about $200 million.”

7:40Somnamed's unique product

“Somnamed developed a mouthguard that moves your jaw slightly forward to treat sleep apnea.”

11:41Lessons from mistakes

“Even the most well-credentialed people who are aligned with shareholders get it wrong.”

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