Small caps: How early research can uncover opportunities before the market

Pendal investment analyst CALLUM SINCLAIR explains why getting ahead of an earnings rebase can be critical in small caps — and how early research can uncover opportunities before the market catches on.

• Small caps offer early earnings opportunities
• IPO market slowly regains momentum
• Find out about the Pendal Smaller Companies Fund

For Pendal investment analyst Callum Sinclair, small-cap investing is less about calling macro trends and more about finding bottom-up opportunities early.

“We’re not trying to make money from macro bets — that can be a fool’s errand in small caps — but we are conscious of them. We won’t go fully long consumer into a downturn, and vice versa.”

While the ASX Small Ordinaries Index delivered positive returns in FY26, Sinclair says performance has been highly uneven.

Contractors, defence and resources — particularly gold — have done much of the heavy lifting.

“Performance in FY26 has shown significant dispersion across and within sectors,” he says.

“The materials sector has been the top performer, up nearly 40 per cent, with industrials close behind before performance tails off sharply.

“Consumer-exposed stocks are at the bottom of the table. Even within industrials, dispersion has been wide.

“Some industrial stocks are down 30 to 50 per cent while gains have been skewed towards a handful of contractors.”

Two beneficiaries have been Southern Cross Electrical (ASX:SXE) and NRW Holdings (ASX:NRW), which Sinclair says have gained from contract wins and data-centre build-out tailwinds and more than doubled in value over FY26.

The Pendal Smaller Companies Fund holds positions in both companies.

Some of these investments were identified by the small-caps team years ago, but Sinclair says FY26’s narrow market leadership is creating new opportunities.

“We have a five-person team on the road all the time,” says Sinclair. “Lewis Edgley, co-portfolio manager of Pendal Smaller Companies Fund and Pendal MicroCap Opportunities Fund, has just returned from two weeks in the UK.

“Several of us have been interstate in the past three months, meeting companies and assessing how conditions have changed.

“The aim is to work out what is happening before it becomes obvious. By the time companies tell the market, it can already be too late.

“We’re trying to do the work and find companies before earnings inflect. That way, investors can benefit from both the earnings uplift and the re-rate as the market discovers these companies and recognises growth can continue.”

IPOs staging a comeback

The IPO market is also starting to recover, with several successful ASX listings this year and more expected.

Online furniture retailer Koala (ASX:KOA) debuted in March, body-piercing chain Skin Kandy (ASX:SK1) listed in May, and FDC Consolidated (ASX:FDC), a diversified construction company, became Australia’s largest IPO this calendar year.

“We’re seeing the IPO market slowly thaw,” says Sinclair.

“There are expectations of more IPOs in the second half of the calendar year.”

The team takes a selective approach to IPOs, participating in the FDC and SkinKandy listings.

“In both cases, we invested because they have strong returns or unit economics and balance sheets that can fund continued organic growth,” Sinclair says.

Find out about

Pendal Smaller Companies Fund

Patrick Teodorowski & Lewis Edgley,
Portfolio Managers

Learn more