Four ‘musts’ for your portfolio

Out-of-favour and cyclical stocks offer opportunities for investors who have the stomach for it and can anticipate a rebound but we believe there is a better option. The micro- and small-cap segments of the market are structurally inefficient due to relatively low commission potential and limited trading volumes keeping stockbrokers away, and lower levels of liquidity preventing larger institutions from meaningful participation.

Having a diligent selection framework is critical, with a focus on key factors such as competitive positioning, future prospects, balance sheet strength, cash flow characteristics, profitability profiles, quality of management and valuation.

Nick Scali (ASX: NCK) is a leading furniture retailer with a huge nationwide store footprint (currently 45 with a long-term target of 75 across Australia and New Zealand). While earnings have more than tripled since 2012, the equity base has roughly doubled. This demonstrates a strong return on equity and implies quality management and a business with a high-quality, self-funded growth profile.

Collins Foods (CKF) is a leading restaurant operator, manager and administrator. Its core business is the operation of almost 200 KFC stores across Australia and Germany. It has established a sufficient pipeline for organic growth in both regions, which, combined with a discount to future value, presents a promising longer-term opportunity.

Elanor Investors Group (ENN) is a multi-level investment manager whose segments include funds man- agement, hotels, tourism and leisure, real estate and special situation investments. Along with diversified exposure and high-calibre management, Elanor continues to display growth in recurring income with an attractive yield of 7.1%.

Folkestone (FLK) is an emerging asset manager and property developer with a platform that encompasses the management of a listed A-REIT, income-focused property syndicates and a substantial multi-sector development pipeline. We believe Folkestone, led by a quality management team that owns a substantial stake in the business, can deliver strong growth in earnings per share over the coming three years.