Buy Hold Sell: The top small-cap picks for 2023 (and 2 fundie favourites)
We're back, baby! For the first episode of Buy Hold Sell for 2023, we're taking a look at Livewire readers' favourite small-caps stocks for the year ahead... And what a list it is.
Think a rare earth miner which boasts Australia's richest billionaire as a major investor, a tech darling that has taken a painful dive from its highs, and a stock next in line for the lithium throne.
There's also the only true copper play on the ASX after BHP and OZ Minerals' $9.6 billion deal, and, of course, another lithium hopeful because, as this anonymous writer has penned before, if there is one thing Livewire readers love more than dividends and long-term compounders (and don't forget long-term compounders with growing dividends), it's lithium stocks.
In this episode, Livewire's Ally Selby was joined by Marcus Today's Henry Jennings and Medallion Financial's Michael Wayne for their analysis of these tantalising small-cap stocks.
And just in case they were not a fan of readers' top picks, we also asked them to name the small cap they believe should have made the top five instead.
Note: This episode was filmed on Wednesday 24th January 2023. You can watch the video, listen to the podcast or read an edited transcript below.
Ally Selby: Hello and welcome back to Buy Hold Sell for 2023. I'm Ally Selby, and today we're starting the new year off with an absolute cracker. We're going to be analysing your most-tipped small caps for 2023, and just in case our experts absolutely hate those, we've also asked them to name a stock that should have made the list. To do that, we're joined by Michael Wayne from Medallion Financial and Henry Jennings from Marcus Today.
First up we have readers' most-tipped stock. It's Arafura Rare Earths. It's a rare earth explorer based in the Northern Territory. Henry, I might start with you. Is it a buy, hold or sell?
Arafura Rare Earths (ASX: ARU)
Henry Jennings: I'm amazed this is the most-tipped stock.
Ally Selby: Most-tipped small cap.
Henry Jennings (BUY): Most-tipped small cap. Arafura has been around for a long, long time, I've got to say. We've been hearing about the Nolans rare earths project for a long time. Finally, it's on the cusp of getting there. I'd be a buyer of this one. I think rare earths are going to be a 2023 story, and I think the West has woken up to the strategic value of rare earths again. I mean, we've seen this before. And I think Arafura is the next best placed after Lynas Rare Earths (ASX: LYC). It's the next cab off the rank, so I'm a buyer of this one.
Ally Selby: You said you can't believe readers are voting for it, but it's share price rose are whopping 156% over the past 12 months.
Henry Jennings: Well, [Gina Rinehart's] Hancock Prospecting being involved is the Midas touch. That's kind of the big tick of approval, isn't it? The fact that she's got billions and is a tiny part of it, it's like me putting $2 into a company really, but it looks good.
Ally Selby: Over to you, Michael, is it a buy, hold or sell?
Michael Wayne (HOLD): We're going to go hold on Arafura. It's one that we do hold for clients and done very well off in the last six months or so, but there was a capital raising at the back end of last year, which allowed Gina Rinehart and Hancock Prospecting to take a big stake in the company, or 10% stake. So we feel as though there might be a little bit of hype in the share price at the moment, but we do like the story. They basically produce a very rare commodity, 90% of it comes out of China. It's an enormous asset with over 30 years mine life. They've got some good offtake agreements with the likes of Hyundai and Kia. So they look like they're going to be able to deliver production by 2025, and if they are able to do so, we think the share price will do very well, notwithstanding some volatility along the way. So I'll go a hold at the moment with a view to buying some more if it pulls back.
Megaport (ASX: MP1)
Ally Selby: Okay. Next up, have Megaport. It's a cloud connectivity and services company. Michael, I'll stay with you. Is it a buy, hold or sell?
Michael Wayne (HOLD): I'm going to go a hold on Megaport. It's had some pretty lumpy updates over the last six months, although we do like the business generally speaking. It essentially allows customers to access the cloud networks or databases of Amazon, Google and the like. They've been focusing less on signing up new data centres and basically increasing their customers, and also increasing the number of services that they provide to customers. So they are the first mover in this space. They do have a very loyal customer base, and we do like the long-term outlook, but we're just a little bit uncertain at the moment, given the recent volatility in their updates, which have caused volatility in the share price. So happy to hold for now with a view to reviewing after the February reporting season.
Ally Selby: Megaport has not had a great past 12 months, and that's putting it lightly. Its share price dropped around 54% because of rising interest rates. Henry, is it a buy, hold or sell?
Henry Jennings (BUY): It's a buy. I think at the end of the day, tech is starting to rebound. We've seen this in the US with all these job cuts that we've seen. Megaport is one of our top tech stocks. And if you're going to go into tech, you tend to go into the Megaports of this world, as well as the NEXTDCs (ASX: NXT), the WiseTech Globals (ASX: WTC). A lot of the CAPEX and the OPEX are behind it in '21/'22. So I'm bullish on this one. And it has fallen a long, long way. And I think that's one of the themes of 2023 - the dogs of '22 will start barking. They'll be out of the kennel, and they're going to be off the leash and running wild.
Liontown Resources (ASX: LTR)
Ally Selby: Next up we have lithium explorer and developer, Liontown Resources. Is that one a buy, hold or sell?
Henry Jennings (BUY): It's a buy. I'm going to be really positive on all these stocks today. It is a buy. And it's been a buy for a long time. They've got a project called Kathleen Valley. In recent days, we have seen a big cost overrun there. Not a massive surprise. I mean, there are some inflationary pressures in the system. They've also increased the output they're going to be putting through the plant as well, which has meant that it's going to cost more to get it up and running. But these guys, they've got some pretty good management. It's a great project. It's a big, big project. The stock has suffered, it's bounced. I still like this one. I think it's the next tier after the likes of Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN) and maybe IGO (ASX: IGO) in the ranking of those lithium stocks.
Ally Selby: As you mentioned there, it's been quite a volatile past 12 months. Its share price has pretty much ended up flat though. Michael, is it a buy, hold or sell?
Michael Wayne (HOLD): We are going to go hold on this one. We like the lithium space. But it depends on which side of the fence you sit on. Macquarie's very bullish on one hand, and Goldman Sachs is quite negative on the other. But for Liontown, a major drawback at the moment is the cost overrun that Henry pointed out. There was a 60% increase in CAPEX required to deliver that project. They seem to have the right funding to do that at the moment, although management will be reviewing that funding later in the year, which to our mind, adds an element of uncertainty, and therefore we're happy to give this one a bit of a wide birth for now, given that there are plenty of other high-quality lithium producers and lithium explorers out there to choose from.
Sandfire Resources (ASX: SFR)
Ally Selby: Next up we have copper miner, Sandfire Resources. Michael, is that one a buy, hold or sell?
Michael Wayne (BUY): We've got a buy on Sandfire. It's one we already hold for clients, but happy to put new money to work in that name. They've got an old mine which is running out of mine life, DeGrussa, but they've done a very good job in purchasing a mine in Spain recently. So they've got that, and they're also about to bring into production a new project in Botswana as well. We like the outlook for copper. We think that the electric vehicles theme is very supportive of that. Four times as much copper is required for electric vehicles compared to an old-school combustible engine vehicle. So Sandfire these days we think is one of the best opportunities on the ASX, particularly now that Oz Minerals (ASX: OZL) is no longer listed.
Ally Selby: It's had a very volatile ride over the past 12 months. Since October, its share price has rebounded around 95%. It's still down around 5% over the past 12 months. So Henry, over to you, is it a buy, hold or sell?
Henry Jennings (BUY): I'm going to continue with the positive theme. I think it's a buy for me. It is copper, and there are very few pure-ish copper plays on the ASX with the absence of OZ Minerals when they disappear off the market. Where else do you go? You're going to go with BHP Group (ASX: BHP) or Rio Tinto (ASX: RIO)? It gets hard. And Sandfire ticks a lot of boxes. DeGrussa is running down, but as Michael says, Botswana and Spain really starting to kick some goals. They've raised money at $4.30, which was snapped up in a matter of minutes, and then the stock just kept going up. So I like this one still. I think this gives you the copper exposure that you could have gotten through OZ Minerals, and now you need to get through Sandfire.
Core Lithium (ASX: CXO)
Henry Jennings (BUY): I've been a big fan. I held it PA, and I bought it a long time ago, and I sold the last of it at $1.50 and was pretty happy to get out. It went to about $1.90 or something, and I was a bit miserable then. But it's come a long way back. The problem has been, it's not easy bringing production on, and Core Lithium has had some issues. It was supposed to be by the end of '22, but it hasn't happened. They had some DSO shipments - some direct shipping ore that has helped - but they're now talking about the first half of '23. So things have slipped, and that's obviously upset the market a little bit.
But against that, you've seen the massive [cash generation in the sector]. Pilbara Minerals added $800 million in cash in the last quarter because of high prices. Once Core Lithium starts humming, they're going to be adding cash big time. I mean, not to the same extent as Pilbara. So it will have its day, but it's kind of lithium-interrupted, girl-interrupted, somewhat delayed a little bit here. So I think this one's a buy, especially towards $1-$1.10, which is where they are at the moment.
Ally Selby: The share price has lifted around 41% over the past 12 months. Michael, is it a buy, hold or sell?
Michael Wayne (BUY): I'm going to go buy on Core Lithium, albeit a more risky buy. We prefer, if you want, a safer option, of Pilbara and Allkem (ASX: AKE), just given their producing and capitalising on the high prices at the moment. But with Core Lithium, they've got one of the best lithium assets close to ports. The government has designated it a major asset for the country because of its location. They had some management turnover in the middle of last year. I think the CEO might have moved away, the CFO as well, but that's not to be unexpected, because when you transition from being an explorer and developing the infrastructure and building the mine, that's one skill set compared to when you're actually in the production phase. So for now, we're happy to give it a more speculative buy. If they can meet those targets and get into production by the middle of the year whilst prices are still very high. I think the market will recognise that, and the share price should appreciate off the back of it. So buy for now.
Fundie favourites for 2023
Ally Selby: Okay. It seems our fundies really loved your most tipped small caps for 2023, but Michael, I'd love to know, if you could pitch your top stock for 2023, what would it be and why?
XRF Scientific (ASX: XRF)
Michael Wayne: I'm going to go XRF Scientific. So staying on that mining theme. It is a small cap, a smaller business, but it's by no means speculative. The balance sheet's very high quality, it pays a decent dividend yield of around 3%. It was 4%, but the share price has gone up, so it's back to around a 3% dividend yield. Basically what it does is it provides the machines and the testing kits so that miners can test their core samples. The good thing is, once they sell the machines, there are consumables or different types of assets required to test those core samples. Once they're used once, they've got to be discarded, and then new products have to be brought in. So the margins are growing nicely, revenues are growing nicely, earnings are growing nicely, as are dividends, and we expect momentum in the share price to continue. So we've got to buy on XRF Scientific.
Ally Selby: Okay. Henry, your time in the hot seat. What's your top small-cap pick for 2023, and why?
Calix (ASX: CXL)
Henry Jennings: I had so many that I wanted to choose and I'm going to choose just one, Calix. It had an interesting 2022. These are the guys that use a calciner, which is a process whereby they take carbon dioxide out of the cement process. The good news in '22 was that they got HeidelbergCement on board as a partner. They've got a few other partners. Pilbara Minerals is one as well. The bad news was that, towards the end of the year, they did lose some loans and some grants that the previous Scott Morrison government had given them. I think it was a bit political, to be honest.
Let's face it, we all had really good intentions about climate change and taking carbon oxide out of the atmosphere, and it all went out the window when Vladimir Putin walked into Ukraine, and everybody's gone, oh, we better get some coal, we better get this, we better get that, and we forget climate change. In 2023, it is going to be back on the agenda, I think, and Calix will be at the forefront. It's a good stock, a good story, good management, good technology, and the Heidelberg agreement, thumbs up.
Ally Selby: Well, that's all we have time for today. I hope you enjoyed the first episode of Buy Hold Sell for 2023. If you did, why not give it a like? Remember to subscribe to our YouTube channel. We're adding so much great content every week.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.
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