There is increasing divergence in the performance of the perceived winners and losers from the COVID-19 pandemic, which has created attractive opportunities for some emerging companies, according to DNR Capital.
Sam Twidale, DNR Capital Australian Emerging Companies portfolio manager, said key structural trends will be accelerated by the crisis.
“However, we still need to be careful not to over capitalise the one-off benefits many companies are seeing in the short term,” Twidale said.
“For example, the positive impact of unprecedented fiscal stimulus on consumer companies, or the accelerating shift to digital and e-commerce based business models.
“Conversely, with increasing concerns around the spread of COVID-19, companies most severely impacted in the short term have suffered significant share price falls given depressed valuations.
“These include companies with leading industry positions and strong balance sheets which we expect to take a greater share of the market during the eventual recovery.”
Given the current uncertainty, it was important to focus on what could be controlled, which included investment discipline and investing in high-quality companies with a long-term horizon of five years.
Strong balance sheets were an important requirement but there should also be a focus on long-term cashflows, not earnings over the next six to 12 months.
“We need to look beyond the near-term earnings downgrades arising from COVID-19 in favour of valuations based on long-term cash flows,” Twidale said.
“Although some of these companies suffer from a lack of visibility in the short term, it is this uncertainty that presents attractive opportunities for long-term investors.
“We look for companies with a strong industry position, disciplined management, a resilient balance sheet, high earnings quality and low environmental, social and governance (ESG) risks.”
According to FE Analytics, the fund has returned 15.98% since its inception on 31 August, 2018, to date.
Performance of DNR Capital Australian Emerging Companies since inception
