‘Frustrating’: Fund backs 3 great ASX shares with plunging prices


No doubt you’re getting sick of the sea of red on your online ASX shares portfolio.

But it’s not just everyday retail investors feeling the pinch. The professionals aren’t faring much better in a rough market.

One of the most successful funds in recent years, the Cyan C3G Fund, revealed this week that it “suffered badly” in May to see a fall of 14%.

“Performance in May was incredibly frustrating,” portfolio managers Dean Fergie and Graeme Carson told clients in a memo.

“All but one of our holdings fell over the month, resulting in the overall poor performance.”

Cyan attributed the “severe selling pressure” to a perfect storm of supply constraints, central bank tightening and geopolitical issues.

“In the six weeks to early June, the S&P/ASX Emerging Companies (ASX: XEC) index has fallen 17%.” 

Normal programming will return sooner or later

But in the long run, the pair said fortunes would turn around.

“Logistics is improving, supply chains are opening up, costs are still a challenge but will subside as other parts of the supply chain normalise.”

A steep hike in interest rates will indeed temporarily result in depressed consumer spending. 

But the portfolio managers reminded clients that even a 150-basis point increase would result in a cash rate that’s still historically low.

“In terms of valuing companies on future earnings (which is what the stock market does), it is far from terminal, or perhaps not even particularly material,” read the document.

“We feel the market is being overly bearish on where long-term rates might land.”

Considering this, the Cyan team named three ASX shares that plunged last month that still have excellent underlying businesses (and it’s still holding onto):

Value of brands could exceed the company’s current valuation

Brewer Mighty Craft Ltd (ASX: MCL) watched in horror as its share price lost a quarter of its value last month.

It has lost even more in this week’s brutal sell-off, to be down 42% since the start of May.

For the Cyan team, this is purely a macroeconomic reaction — because the business is going gangbusters.

“It is currently being valued at $70 million by the market,” read the memo. 

“[But] it is expected to deliver more than $70 million in sales during this COVID-impacted year and strong profitable growth in FY23.”

The company has a 37% stake in fast-growing brand Better Beer, which is expected to sell 4 million litres this financial year and 10 million in the next.

“On those metrics — at $25 per litre of value (which is the general metric for valuing boutique beer brands that reach scale) — Mighty Craft’s ownership of the brand alone could be worth $90 million+.”

No debt, profitable, pays dividend

Cyan lost 15% on its Kip McGrath Education Centres Limited (ASX: KME) last month.

Kip McGrath runs an education and tutoring business in the English-speaking markets of Australia, New Zealand, the United States, the United Kingdom and South Africa.

The financials are healthy, according to Fergie and Carson, who noted it has no debt, is cash flow positive, profitable, and pays a dividend

The company is also forecast to grow revenue and earnings in excess of 20% next financial year. 

“It is potentially an M&A target and has recently successfully pushed into the US,” read the Cyan memo.

“The stock is down 40% from its highs of a few months ago and has delivered no negative news.”

‘Extremely attractive’ takeover target

Fergie and Carson have been fans of micro-investing platform RAIZ Invest Ltd (ASX: RZI) for a while, and a 15% loss in May hasn’t changed this view.

This is another ASX share that has no debt and holds $18 million in cash.

“Over the past 12 months, it has grown active customers by 50% to around 650,000, who collectively invest more than $1 billion,” read the Cyan memo.

“The company is profitable in its core operations in Australia and is pushing successfully into south-east Asia.”

May was just the continuation of a shocking run in 2022. Raiz shares have plunged almost 64% since the start of the year.

Similar to Kip McGrath, Raiz could make an “extremely attractive” takeover target.

“As a comparative valuation, Raiz’s US parent Acorns Grow is valued at ~$800 per customer,” the memo read.

“Completely ignoring Raiz’s 350,000 strong customer base Asia, its Australian business of 290,000 customers is presently being valued by the local market at just $170 per customer.”

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