Company Interview / Steve warns about overheated small caps

Key points:

Small caps have outpaced large caps in 2025, but some valuations appear stretched Major winners like Catapult, Bravura, and RPM Global have been sold or scaled back Current focus includes Chorus, AML Payments, Pramium, and IDP Education Heightened selectivity and caution towards companies with significant internal challenges

Steve Johnson from Forager Funds Management says Australian small caps have delivered an impressive performance in 2025, outperforming larger peers by more than 10%. However, Johnson notes this surge has led to some share prices becoming overheated, particularly among popular, more liquid small caps with appealing growth prospects. He suggests the market has swung too far for some names and that this dynamic reduces the range of attractive new opportunities for investors focused on value.

Johnson points to strong gains in Forager’s portfolio over the past year, particularly driven by significant long-term positions in companies like Catapult (ASX:CAT), Bravura (ASX:BVS), and RPM Global (ASX:RUL). Notably, RPM Global has received a binding takeover offer, and Forager has exited or scaled down many of its largest winners. Johnson underscores a shift in portfolio composition, emphasising the importance of banking profits in high-performing tech stocks and seeking opportunities in less-loved sectors, such as industrials.

Currently, Johnson highlights fresh investments in Chorus (ASX:CNU) AML Payments (ASX:ALU), and Praemium (ASX:PPS), as well as a new position in IDP Education (ASX:IEL). He remains wary of businesses facing serious operational issues, such as Bapcor (ASX:BAP), Domino’s (ASX:DMP), and Ricegrowers (ASX:SGLLV), advocating for patience and greater selectivity in today’s bullish climate.