Small cap team adeptly navigating early reporting season
Generally speaking, and while it is early days, this earnings season has been a good one both broadly and for the Montgomery Small Companies Fund, overseen by portfolio managers, Gary Rollo and Dominic Rose.
By way of example, according to the London Stock Exchange Group, fourth-quarter U.S. S&P 500 earnings per share are now tracking nine per cent higher than last year, which also exceeds consensus analysts’ forecasts of 4.7 per cent growth back in early January. The historical track record also suggests results will improve further as reporting season progresses.
In Australia, since the market lows in October last year, the local bourse has rallied more than 10 per cent. That, however, has not prompted strategists to take off their bear coats.
According to AMP, the consensus outlook suggests a 2024 earnings decline of 4.9 per cent, primarily attributed to a significant downturn in profits within the energy sector. AMP also expresses concern that equities currently appear “overbought” and susceptible to a potential near-term correction. Similarly, Macquarie’s equity strategists have cautioned their clients against overly optimistic investments in stocks that have surged in anticipation of a jump in earnings that has yet to materialize.
Gary and Dominic at the Montgomery Small Companies Fund, have less to worry about now that a few of their top five holdings, including Pinnacle and Megaport, have already reported.
We have referred investors to Megaport’s prospects since 8 August 2019, when the share price was $7.20. This reporting season, the company’s shares rallied as much as 30 per cent in a single day when it announced a five per cent increase in revenues of $48.6 million for the third quarter, annualised recurring revenues (ARR) of $192 million – also up four per cent quarter on quarter (QoQ), and earnings before interest, taxes, depreciation, and amortisation (EBITDA) of $15.1 million. The latter was up to 50 per cent better than consensus analysts’ expectations of $10 million. Positive net cash flow was maintained at almost seven million dollars, and net cash now sits at $45.8 million. Importantly, capital expenditures were revised lower from $28-$30 million to $20-$22 million.
Another Montgomery Small Companies Fund Top 5 holding is Pinnacle Investment Management. That company’s shares rose almost nine per cent on the day of its announcement that interim profits were steady with a year earlier at $30 million or 15 cents per share, but that funds under management (FUM) grew strongly thanks to inflows into its cash fund and credit fund partnerships.
Pinnacle announced that its aggregate affiliates’ FUM increased by $8.2 billion, or nine per cent, over the six-month period, reaching $100.1 billion.
The company’s aggregate retail FUM came in at $25.9 billion, which was up $3.2 billion or 14 per cent from 30 June 2023. Another reason for the jump in its share price was the $4.5 billion in reported net inflows for the half year. That’s a big improvement from the $1.5 billion net outflows in 1H FY 2023.
As reporting season progresses, keep in mind, unlike other analysts, strategists, and commentators, I remain optimistic about the prospects for small innovative and growing companies. Since the 1970s, a combination of disinflation and positive economic growth (even if anaemic) has always been positive for innovative growth companies, of which there are many in the small cap space and in The Montgomery Small Companies Fund.
The Montgomery Small Companies Fund owns shares in Megaport and Pinnacle. This blog was prepared 12 February 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies, you should seek financial advice.