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ASX stocks come in all shapes and sizes, but in recent weeks, there has been a particular focus on small-cap stocks.
With quarterly updates from many fund managers making the rounds, we now get a unique insight into the positions held by these market players.
Forager Funds Management has highlighted three ASX stocks, all worth less than $1 billion in market capitalisation, as potential future winners.
Forager with flag Catapult Group International Ltd (ASX: CAT) and Tyro Payments Ltd (ASX: TYR) in the 2024 Investor Roadshow as businesses with long-term potential.
Also tagged NZX Ltd (NZE: NZX) as one to watch internationally.
Here’s what the fund manager said.
ASX stock poised for growth
Catapult Group has become the largest position in Forager’s portfolio. Known for its wearable technology used by professional sports teams, the company offers devices that allow coaches to monitor players’ performance in real time.
The firm said Catapult’s wearable technology produces “sticky” revenue, with the company expecting over 15% annual sales growth for the next three years.
Chief investment officer Steve Johnson praised Catapult’s recurring revenue model and low churn rate of just 4% per year.
Once a professional sports team starts using Catapult technology, they rarely turn it off.
The management team has achieved, integrated the product, spent the money to do this and now [is] showing very strong signs of continuation of this operational leverage.
The ASX stock is also focused on converting this growth into meaningful free cash flow, Johnson says. It is currently trading at $2.02 per share.
Tyro Payments another favorite
Tyro Payments is one of the largest payment providers in Australia, with approximately 70,000 merchants in its network.
Despite facing macroeconomic headwinds, Forager is bullish on the outlook for ASX shares.
By now you would have seen Tyro terminals around they are the leading independent provider of payment terminals, it is a great alternative for small and medium enterprises to the big banks…
…It is currently trading at a particularly attractive 10% free cash flow yield. It is facing some macro headwinds that have caused other investors to sell that stock lower.
Morgans is also positive on Tyro with a $1.47 price target. The broker is attracted by Tyro’s “much greater focus on raising overall profitability,” according to my colleague James.
NZX also gets a mention
Johnson also discussed the fund’s position in NZX Ltd, the operator of the New Zealand Stock Exchange.
According to Forager, it offers a diversified income stream through exchange-traded funds (ETFs), low-cost fund management and wealth technology services.
The ASX share has seen low market turnover recently, which Forager Funds believes is cyclical. It expects rising earnings and is drawn from the NZX’s fixed cost base.
The cost base here is fairly fixed, so a significant amount of incremental revenue must trickle down to profit.
[Meanwhile], the fund management business has been growing for quite some time and continues to grow and in the wealth technology business, they have acquired some new clients recently. This is a business that nzx had spent more than $40 million on over the past five to 10 years…
…we think the business is close to becoming free cash flow neutral and that will be a huge boom in the amount of free cash flow that the entire business generates.
Forager reckons NZX could generate over 10% free cash flow earnings to enterprise value based on forecasts through FY26.
ASX stocks to watch
These ASX shares, each worth less than $1 billion, have shown strong potential for growth and profitability.
They might be worth a look. Forager Funds elections highlight the fund’s confidence in its future performance.
But there’s no telling what might happen from here. Mutual funds such as this have very diversified portfolios to cover the downside.
In this regard, remember to do your due diligence and consult professional advice when necessary.