Oct 30, 2026 · 49 min
Small-cap investors await capitulation before buying
Chris Stott: The small-cap buying opportunity is still ahead
Chris Stott argues that economic weakness may deepen before small-cap industrials offer the risk-reward he wants.
- 1Stott has sold highly valued AI infrastructure winners while maintaining valuation discipline across contractors.
- 2He wants to see bad news met with rising share prices before buying small-cap industrials aggressively.
- 3BAPCOR offers a discounted turnaround case, while Wagners stands out as his preferred five-year holding.
Don't miss
Chris Stott names Wagners as the one stock he would own for five years, linking its businesses to infrastructure demand ahead of the Brisbane Olympics.
The brief
Chris Stott of 1851 Capital says the small-cap industrial buying opportunity is getting closer, but rates, uncertainty and economic weakness have not yet produced full capitulation.
He has sold AI and data-centre beneficiaries such as Southern Cross Electrical after strong gains, arguing that attractive businesses can still become poor investments at demanding valuations.
The signal Stott wants is counterintuitive: companies report bad news or earnings downgrades while their share prices rise, showing that selling pressure may be exhausted.
Against a weaker economy, he looks for structural growth in businesses such as COG Financial and sees BAPCOR as a discounted turnaround rather than a former market favourite.
For a five-year holding, Stott chooses Wagners, citing its cement and concrete operations, composite fibre technology and potential infrastructure demand ahead of the Brisbane Olympics.
What was said on this episode
21 statements · 13 positive · 6 negative · 2 neutral
AI will remain an enduring technology.
“AI is here to stay.”
Listen at 9:08
- Chris Stotton AI infrastructure stocksNegative9:17
The easiest gains in some AI-related stocks have already occurred.
“the easy money's been made in some of those names.”
Listen at 9:17
- Chris Stotton AI infrastructure contractorsNegative9:21
Some contracting businesses traded above 30 times earnings.
“For contracting businesses, their price-turnings ratios went north of 30 times PE.”
Listen at 9:21
- Chris Stotton AI infrastructure contractorsPositive9:58
Stott would reconsider AI infrastructure stocks if valuations become more attractive.
“if the valuation came back to more suitable levels, we'd be looking to come back into those companies.”
Listen at 9:58
- Chris Stotton AI infrastructure contractorsNegative10:17
AI infrastructure contractors are currently somewhat crowded trades.
“I feel like they're a little bit crowded”
Listen at 10:17
- Chris Stotton Small-cap valuation disciplinePositive10:55
Stott recommends maintaining valuation discipline in small-cap investing.
“we try and stick with our valuation discipline, which is a really important part of our investment process.”
Listen at 10:55
Baby Bunting is a market leader.
“They're a market leader.”
Listen at 21:07
- Chris Stotton Birth ratesPositive21:22
Falling birth rates will eventually reverse.
“At some stage, that reverts. Typically, that does revert if you look back over time.”
Listen at 21:22
- Chris Stotton Australian small capsPositive22:19
Australian small caps always contain pockets of growth despite economic conditions.
“there's always pockets of growth, no matter what the economy is doing.”
Listen at 22:19
- Chris Stotton Novated leasingPositive23:49
Novated leasing is experiencing strong growth despite weak economic conditions.
“this is probably one sector that we're seeing you know really really high levels of growth in in a really anemic economic environment”
Listen at 23:49
- Chris Stotton COG FinancialNeutral23:57
COG Financial derives half its profit from novated leases.
“companies like cog financial uh which is in our top five holdings in our fund you know half their profit comes from novated leases”
Listen at 23:57
- Chris Stotton Novated-lease companiesPositive24:13
Some novated-lease companies are growing 20–30%.
“that is that is one part or one sector where we're seeing you know 20 to 30 growth in some cases”
Listen at 24:13
- Chris Stotton COG Financial, McMillan Shakespeare, and SmartgroupPositive24:32
COG Financial, McMillan Shakespeare, and Smartgroup are well positioned for coming years.
“those companies are certainly very well positioned, we believe, over the next couple of years.”
Listen at 24:32
- Chris Stotton COG FinancialPositive24:47
COG Financial remains attractively valued with low-double-digit earnings multiple and growth ahead.
“in the case of COG Financial, you still don't. You know, it's on a PE, low double digit PE right now with a really attractive growth pilot. growth profile ahead of it.”
Listen at 24:47
- Chris Stotton Australian small-cap investment universeNegative33:04
The Australian small-cap investment universe is shrinking.
“the investment universe that we invest in has been shrinking”
Listen at 33:04
- Chris Stotton Australian small-cap IPO marketNegative33:08
Australian takeovers outnumber new IPOs year by year.
“there's been more companies being taken over year by year, more so than companies coming to market in the form of a new IPO.”
Listen at 33:08
- Chris Stotton Australian IPO marketNegative33:46
The weak IPO environment is unlikely to change within five years without reform.
“it's hard to see that changing in the next five years unless there are some changes made to the IPO market”
Listen at 33:46
- Chris Stotton Private company fundingPositive36:13
Private funding is typically more attractive because it avoids public-market scrutiny.
“typically that's more attractive for people to stay private because they don't have the scrutiny of being public.”
Listen at 36:13
- Chris Stotton Generation Development GroupPositive38:09
Stott re-entered Generation Development Group below $3.
“GDG has come back to much lower levels, you know, sub the $3 mark where we've re-entered a position in the company now.”
Listen at 38:09
- Chris Stotton Generation Development GroupPositive38:33
Generation Development Group is no longer a crowded holding.
“we feel as though now it's not crowded at all”
Listen at 38:33
- Chris Stotton Stock crowdingNeutral40:53
Crowding alone does not determine whether Stott sells a stock.
“it's definitely not a single factor that would cause us to sell”
Listen at 40:53
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Books & mentions
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