Volatility creating stock-picking opportunities in micro caps, says Ellerston

Portfolio managers Alexandra Clarke and David Keelan, who manage the Ellerston Australian Micro Cap Fund, say recent market dislocations are opening attractive entry points across the small and micro-cap universe.

“We expect the coming quarter to present further opportunities for active stock picking,” they say.

Clarke notes that recent weakness in technology stocks have created opportunities to invest in high-quality businesses at more attractive valuations. “The recent indiscriminate sell-off in technology has, in our view, created several attractive entry points in fundamentally strong businesses that have been caught up in the broader market decline.

“Volatility has also allowed us to buy stocks we like at better prices, where the fundamentals remain strong but share prices have fallen due to sentiment – this creates opportunities for investors willing to look beyond short-term noise,” she adds.

“Indiscriminate, sentiment-driven selling can create dislocations between price and underlying earnings trajectories. That’s precisely where active stock selection has the greatest opportunity to add value.”

For example, Ellerston Capital portfolio manager Nick Markiewicz, who runs the firm’s global mid small-cap equity fund, says ‘dispersion ‘– where stocks move differently to each other, even within sectors and sub-sectors – is at near-record levels and driving a lot of the trading activity.

“This dispersion is at a level similar to the global financial crisis and dotcom bubble as analysts grouped the latest earnings results into AI ‘winners’ and ‘losers’ buckets, rather than trying to explain trading performance by sector or quantitative factors. This dispersion, between the AI winners and losers, was the story of the latest earnings season,” says Markiewicz.

Inflation driving sector rotation

Clarke says persistent inflation is also reshaping capital flows across the market. “Investors are increasingly rotating capital away from expensive technology stocks and into more defensive sectors such as consumer defensives and utilities as they position for ongoing inflationary pressures.” Despite these shifts, she says Ellerston’s focus “remains firmly on high-quality companies with resilient balance sheets, clear pricing power and multiple drivers of sustainable growth.

“We are positioned in high-conviction names that we believe can compound earnings over time and deliver superior risk-adjusted returns throughout the cycle. Our aim is to identify opportunities with at least a three-to-one risk-reward profile and the potential to generate returns of around 15 per cent per annum over the medium term,” she adds.

Infrastructure tailwinds supporting Wagners

Keelan points to construction materials and infrastructure company Wagners (ASX: WGN) as a recent contributor to the fund’s performance. The stock rallied almost 30 per cent in January after delivering a result that materially exceeded expectations, and upgrading its full-year earnings guidance.

“The company reported stronger volumes across cement, concrete and quarry products,” Keelan says. “There is also growing confidence that new capacity and infrastructure opportunities within its poles business can support further earnings growth.”

He added that the business remains well positioned to benefit from structural investment in infrastructure, particularly in South-east Queensland.

“We believe Wagners is well-placed to continue benefiting from the structural tailwind of infrastructure spending in the region.”

On-the-ground research driving new ideas

Keelan says Ellerston has been “getting back on the road and meeting with existing and prospective portfolio companies on their own turf.” This allows the firm to stress-test its current holdings “while also screening for new investment ideas across the micro-cap market.”