Fund Manager

Why Ex-20 stocks outperform and the outlook for lithium

Wed 29 Nov 23, 9:47am (AEDT)
Tim Carleton - Primary - Rapid Fire
Source: Livewire Markets

Key Points

  • ASX MidCap50 has outperformed ASX20 and Small Ordinaries, delivering 800% return since 2000, attributed to compound earnings growth and reasonable valuations
  • Chief Investment Officer Tim Carleton targets Ex-20 stocks for better compound earnings growth, reasonable valuations, and high-quality businesses
  • Carleton anticipates a stabilisation in lithium prices in 6-12 months, with potential for demand to exceed supply, leading to a price increase

Midcaps have been the best-performing segment of the Australian market for the past two decades. The ASX MidCap50 Index has delivered a total return of 800% since 2000, beating the ASX20 and the ASX Small Ordinaries, which have delivered 500% and 200% over the same period.

Tim Carleton, Chief Investment Officer at Auscap Asset Management, says there is a clear explanation for this outperformance, which is why he actively invests in this part of the ASX. In this Rapid Fire interview, Tim answers questions on the outlook for corporate earnings, why Ex-20 stocks outperform, and the outlook for lithium prices.

Click on the player below to watch the interview or read an edited transcript.

Edited Transcript

We’re starting to see some signs of interest rates biting in company results. Do you think we've seen the worst, or is there more to come?

I think expectations are as low as they're going to get, and I suspect a lot of companies will beat the expectations from this point.

You typically target companies outside the top 20. What are the top three attributes that make the Ex-20 stocks appealing to you?

Compound earnings growth that's better than the rest of the market. Valuations that you can often find that are reasonable for that earnings growth. And very high-quality businesses. We're not dealing with businesses that are marginally profitable here. They're generating a lot of cash today, and we expect that, in many instances, to continue to grow.

The price of lithium has fallen substantially in 2023. Is that a short-term blip, or something more sustained?

I think it's unclear where prices will settle for lithium over the medium-term, but we expect a stabilisation in the next 6-12 months. And from that point, you'll probably see demand exceed supply, which would tend to lead to prices increasing rather than decreasing.

What does value investing mean to you?

Finding businesses that are going to generate strong compound earnings growth over time, and not overpaying for them.

Which sector do you think is most often misunderstood or overlooked by investors?

Retail. The perception around cyclicality in that space is far greater than the reality. And if you use JB Hi-Fi (ASX: JBH) as an example, they've only had two down years in terms of earnings declining in the last decade, and that's better than most of the peers in the healthcare space, the supermarket space, and a lot of other sectors that are perceived to be defensive.

Your favourite metric for assessing a company? What is it, and explain why it matters so that a high school student or I could understand it.

Compound earnings growth, because over time, share prices follow earnings. In the short-term, sentiment matters. What PE people are happy to pay, matters. In the long run, it's just earnings growth that matters, because it's the underlying earnings that people will value.

Mid-cap stocks have outperformed top 20 stocks and small-caps over the past 20 years. True or false, that outperformance will continue for the next decade?


Written By

James Marlay

Co Founder | Livewire Markets

Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading Livewire.

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