Michael Carmody is a portfolio manager at Centennial Asset Management. The Sydney-based boutique oversees about $220 million in assets.
What’s your take on investing in small caps amid the latest news on US tariffs? Have you made any changes to your investments?
Market volatility associated with the US tariff announcements has been challenging. However, having a flexible investment mandate and modest funds under management enabled the fund to effectively navigate the rapid changes in market direction.
Initially, we moved cash levels to 50 per cent and capital into defensive large caps to protect investors but once the Trump administration paused the tariff timetable, we predominantly deployed our cash into ex-100 small-cap companies.
We have a bullish outlook for the market, particularly for small caps. We expect the RBA to cut rates several more times in the next year. This is likely to inject fresh momentum into household spending and to boost the value of consumer-facing stocks exposed to domestic demand. Secondly, post the recent federal election, where the government was returned with an increased majority, we expect housing policies designed to boost supply and affordability to deliver additional growth for companies exposed to the sector.
Recent additions to the portfolio have been Cedar Woods Properties, Nick Scali and Australian Finance Group.
Which stock in your fund has the most near-term upside?
In the short term, we believe Zip has the potential to rally. Zip is well positioned to deliver further strong growth in revenues and profitability. The US buy now, pay later market remains relatively immature and Zip’s US footprint is likely to grow rapidly as it matures. In addition, new product launches are expected to contribute to the company’s transaction volumes and earnings growth during the next year.
Zip’s balance sheet strength and ongoing buyback are also expected to support the share price performance.
Zip has surprised the market with better-than-expected earnings over the last year. Post the most recent quarter, the company upgraded expectations again. We see additional upside earnings risk in the future.
What’s a stock you like and own that (most) people haven’t heard of?
The portfolio currently holds a position in non-bank lender Plenti. We expect the company to deliver strong organic earnings growth as the loan book increases and funding costs decline. Plenti is well capitalised, and the refreshed corporate strategy is expected to deliver disciplined earnings growth over the medium term. We believe the company’s long-term performance targets present material upside to the stock’s current valuation.
Plenti is somewhat undiscovered and likely to trade higher as investors become more comfortable with the business risks and convinced the business model will deliver on its targets.
You have a focus on healthcare stocks. What characteristics make an attractive investment in the sector?
I don’t really think a good healthcare investment is significantly different from any potential investment. The criteria should be similar. A focus on earnings growth, a strong balance sheet, a sustainable competitive advantage, a strong management team and a high return on invested capital are equally important. The healthcare sector in Australia is largely funded by the federal government. That unique funding structure creates its own advantages and investment risks.
We invest in healthcare stocks but not biotech companies. We find the risks and volatility associated with the regulatory approval process too difficult to manage, so we avoid the sector.
What piece of advice has influenced your approach to investing?
I really value the benefits of compounding growth. I think the advantages of continuing to earn returns on previous capital gains is underestimated by many investors. It actually allows investors to take less risk over time to achieve financial goals. I think Albert Einstein was right, “Compound interest is the eighth wonder of the world”. Staying the course and sticking to a wealth creation plan is very important.
Are there any podcasts that you’d recommend?
I’m biased but my colleague Matthew Kidman hosts Success and more interesting stuff. The show focuses on some of Australia’s most successful business leaders. This month, he hosted well-known gold mining founder Jake Klein.
What is your favourite local bar/restaurant?
It is a bit old-school, but I do enjoy a steak on a Friday. The Fairmont Restaurant at the Occidental Hotel in Sydney’s CBD does an excellent medium-rare rib-eye with pepper sauce.
Author: Joanne Tran
