Macquarie's 4 preferred ASX small and mid caps ahead of reporting season

Macquarie is expecting a "solid set of results" across its small cap coverage universe, reflecting a period of robust nominal growth, price inflation and easing wage pressures.

"In this context, we remain positively disposed to companies with structural growth tailwinds that can withstand a potentially more challenging macro backdrop," the analysts said in a note dated 28 January.

The analysts noted four preferred small and mid cap names heading into reporting season, all of which were Buy-rated.

• Macquarie Telecom (ASX: MAQ): "Following its recent announcement of DA approval for its new IC3W data centre in Macquarie Park, should soon be in a position to share further details on facility cost / ramp-up as well as longer-term DC growth ambitions."

• IPH (ASX: IPH): "IPH appears well set up to exceed investor expectations at its 1H24 results as 2023 headwinds begin to ease, including market share challenges, Asia growth and balance sheet. We see valuation near all-time lows as over-capitalising these risks, which may be poised to inflect for the better."

• Life360 (ASX: 360): "Looks well placed to deliver another solid quarter of subs net adds, and we believe valuation remains attractive after the 3Q23 sell-off. Initial FY24 guidance likely brackets consensus, which was revised lower to a more achievable starting point following the 3Q23 result."

• ReadyTech (ASX: RDY): "With the share price -10% off the post-FY23 highs despite a clear positive inflection point in both P&L and cash margins, and achievable mid-term targets that imply meaningful upside to consensus expectations."

• In terms of 12-month share price performance: Life360 (+39.8%), Macquarie Telecom (+26.6%) Readytech (-5.5%) and IPH (-20.4%).

• In terms of share price targets and upside to current prices: Life360 ($10.50 or 36% upside), ReadyTech ($4.50 or 30.8% upside), IPH ($8.75 or 29.4% upside) and Macquarie Telecom ($82.10 or 16% upside)

Looking Back

Macquarie produces an 'Australian Small & Mid Cap' earnings preview note every reporting season, which includes listing a few preferred stocks.

What's surprising is how poorly the preferred stocks performed during August 2023 reporting season. The four preferred stocks were (and how the stocks performed on the day of their results):

• Macquarie Telecom (ASX: MAQ): -6.6% (24 August)

• Lifestyle Communities (ASX: LIC): -4.3% but briefly hit a session low of -12.0% (16 August)

• Data#3 (ASX: DTL): -18.8% (22 August)

• Life360 (ASX: 360): +12.3% (15 August)

Since the August 2023 results (from the day before August reporting date to 30 Jan 2024):

• Macquarie Telecom traded sideways through to November. It's recent strength has coincided with the broader market. The stock is up 2.6% since its FY23 result.

• Lifestyle Communities shares are relatively unchanged since its FY23 result.

• Data#3 managed to recoup most of the result selloff over the next 6 sessions. It traded sideways between September and early November, before breaking out to all-time highs. The stock is up almost 30% since its FY23 result.

• Life360 is down 4% since its FY23 result. The company's founder and CEO Chris Hulls sold around $6 million worth of shares in early December, triggering a negative share price reaction.

The bottom line: The underlying thesis from brokers might be sound but that doesn't stop the company from announcing better or worse than expected results. Data#3 is an example of a company that missed expectations (reported FY23 net profit growth of 22.4% to $37 million which fell short of analyst expectations of $40.7 million) but gathered a lot of momentum post-earnings. Life360 shares have rallied between 5.8% and 12.3% in its last three earnings results. But the stock has struggled in recent months due to factors outside of company earnings. I guess this is why broker research should be used with additional layers or variables.