After several years of underperformance, investors were initially attracted to the better valuations which were available in Small Caps. However more recently there has been a noticeable improvement in risk appetite. This has added fuel to the rally with investors taking comfort from the almost synchronised growth that is occurring around the world.
Finally, investors have responded to slower growth in traditional large cap sectors (e.g. Banks, Telco’s) and begun searching the small cap market to access higher growth sectors such as the Chinese consumer exposed names and small resources
As contrarian value investors we prefer to exit sectors once they become too hot, so we have sold out of our exposure in lithium and infant formula.
One sector which is under the radar at the moment is healthcare. The sector was knocked around for several years as a result of changing government regulations. With the government recently taking a more collaborative approach to reforms we believe the risks have reduced in the sector while ageing demographics continue to be a tailwind. Our preferred exposures are:
- Lifehealthcare, which imports, develops and distributes high end surgical devices. The stock has valuation support (10.3x FY18 PE) and an energetic management team.
- Integral Diagnostics where costs are now coming under control courtesy of a new CEO and CFO. The stock also trades at a discount to peers (15.4x FY18 PE) despite having a strong balance sheet
Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial.
