1851 Capital’s Chris Stott tips reporting season bonanza

The February profit season is shaping up as one of the strongest in many years, according to 1851 Capital’s investment chief, Chris Stott.

1851’s investment chief Chris Stott is upbeat on prospects for the economy and the sharemarket in 2021. Picture: Britta Campion / The Australian

The February profit season is shaping up as one of the strongest in many years, as the economy rebounds and earnings growth is poised to drive a higher sharemarket in 2021 and 2022, according to 1851 Capital’s investment chief, Chris Stott.

Formerly Wilson Asset Management’s head of investment, Mr Stott launched the 1851 fund a year ago just ahead of the COVID-19 induced market rout.

The fund capitalised on instability and buying opportunities presented last year to post bumper annual performance, through its investments in emerging listed companies outside the ASX’s largest 100 stocks.

Mr Stott is upbeat on prospects for the economy and profit season, highlighting record low interest rates, large levels of stimulus, a strong housing market and improving unemployment as positive factors.

“We believe this upcoming reporting season will be one of the strongest we’ve seen for many, many years, and particularly in the consumer discretionary companies and resource companies that are benefiting from record spot commodity prices over the last six months,” he said.

He believed domestic cyclical stocks would lead the equity market gains, while cautioning on valuations in parts of the technology sector.

“Select technology companies are grossly overvalued and ripe for a correction, in particular companies that are yet to make a profit,” Mr Stott said.

On the outlook for the sharemarket and the economy, he notes there are lingering risks around the COVID-19 vaccine rollout and Australia’s trade relationship with China, but it’s otherwise a bullish view.

“The economy is firing, a lot of the trading updates coming through, companies are upgrading their earnings. That gives us confidence in the outlook that earnings growth is going to drive the equity market higher over the next couple of years, as opposed to PE (price-earnings ratio) expansion as we saw pre-COVID,” Mr Stott said, adding that mergers and acquisitions would also be a big theme in 2021.

“We are expecting the next couple of years could be some of the strongest years for our economy for many decades.”

Those comments come as the Reserve Bank governor Philip Lowe on Wednesday provided an optimistic assessment of Australia’s outlook, tipping the economy would regain its pre-pandemic size by the middle of the year, or six to 12 months earlier than previously anticipated.

The 1851 fund now manages $170m — about double what it started with — and Mr Stott and portfolio manager Martin Hickson intend to rule off raising capital in a “soft close” at $400m some time this calendar year.

“Our belief as a fund manager is that size is your enemy and the bigger you get the harder it is to outperform,” Mr Stott said.

Mr Hickson added: “Based on the recent level of inflows our stated soft close target looks like being achieved during 2021.”

The 1851 Emerging Companies Fund returned 26.1 per cent after fees for the 12 months ended January 31, markedly outperforming its benchmark, the S&P/ASX Small Ordinaries Accumulation Index. The benchmark returned 5.4 per cent over the same period.

The 1851 fund’s outperformance narrows to 4.5 per cent over three months.

In Mercer’s tables as at December 31, though, the 1851 fund ranked second over three months in its category, trailing only the Firetrail small companies fund.

1851’s best stocks include People Infrastructure, Eagers Automotive, Frontier Digital Ventures, and The Reject Shop. The fund’s largest holdings are Frontier Digital, Capitol Health, Eagers Automotive and Vocus Group.

While the recent retail and millennial share trading craze – particularly in the US – has caught the attention of fund managers, Mr Stott doesn’t see significant risks emerging from that sort of activity in Australia.

But blog posts and recommendations in retail trading newsletters were at times causing swings in smaller company share prices.

“We have noticed over the years some of the retail newsletters … have started to have more impact in smaller microcap stocks,” Mr Stott said.