The ASX200 regularly has a clearing of the decks for a number of reasons, from takeovers to deep underperformance leading to a business losing its status as a top-quality large-cap business, and vice versa. Last September, we saw the exit of stocks such as Zip (ZIP) and City Chic (CCX), which had both endured their stock plunging from +$14 and +$6, respectively, to around 30c, by definition crushing their market cap in the process – two of the main criteria of eligibility to be in the ASX200 are market cap and liquidity.
NB Newcrest (NCM), as we know it, departs the ASX this week when the takeover by Newmont (NEM US) is completed.
Of the stocks that left the ASX200 last September Life360 (360) has re-entered, illustrating the fluid nature of the process.
Out: Life360 (360), AVZ Minerals (AVZ), City Chic Collective (CCX), Clinuvel Pharmaceuticals (CUV), EML Payments (EML), Janus Henderson (JHG), Pointsbet Holdings (PBH), and Zip (ZIP).
One of the standout market characteristics of recent years has been the deep underperformance of the small-cap index, and while stocks departing the ASX200 don’t instantly become “small caps”, some inevitably will. Hence, in today’s nervous market where investors aren’t trying to buy a turnaround we wouldn’t advocate buying stocks as they depart the main board, some will come good, but the odds are simply against you.
MM is cautious on small caps, short-term
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Moving onto the stocks that re-entered the index, let’s initially consider how they have performed year-to-date:
In: Capricorn Metals (CMM), Charter Hall Social Infrastructure REIT (CQE), Johns Lyng Group (JLG), Karoon Energy (KAR), Lovisa Holdings (LOV), SmartGroup Holdings (SIQ), Spark New Zealand (SPK), and Sayona Mining (SYA).
The first observation is if we’d invested $100 in all of the stocks, we would be well behind: CMM -0.2%, CQE -25.6%, JGL -7.3%, KAR +14.2%, LOV -24.7%, SIQ +71%, SPK -9.8%, and SYA -55.3%. Hence, we evaluate stocks on their individual merit as they enter the ASX200 with a few points worth noting as a silver bullet approach clearly fails:
- Firstly, we give less weight to commodity stocks such as gold and lithium if the whole sector has been strong courtesy of the underlying commodity.
- Secondly, we evaluate them compared to their sector peers as they may have been lifted by fund manager buying as they entered the main board.
In other words, we are looking for specific stock situations where we believe the company can/will add some alpha to one of our portfolios. Today, we have briefly revisited the three best-performing stocks that joined the mainboard last September.
