Livewire | Finding the share market’s next growth winners, and a biotech to watch
This article was published on Livewire Markets, 26 May 2025
Donohue has run the Lennox fund with co-portfolio manager James Dougherty for more than eight years, after the pair of stock pickers left Macquarie Group’s small-cap investment team to set up their own fund.
“How we make money is through research led, bottom up, company specific investments,” Donohue tells Livewire. “We’re a conviction manager so we hold a relatively small number of positions and we think that’s the best way to make money in Australian companies.”
Donohue is specifically focused on finding and owning the best growth companies on the local market and he says this comes down to forecasting their earnings growth because share prices will follow earnings higher or lower over the medium term.
“So, we don’t try and forecast whether things like tariffs will occur or at what rate,” he says. “But we do need to arm ourselves with a level of understanding of impacts on earnings and that will flow into investment decisions and is something we need to be conscious of.”
Picking stocks
Among the fund’s top holdings at the moment are fast-growing internet provider Aussie Broadband (ASX: ABB), financial software provider Iress (ASX: IRE), healthcare operator Integral Diagnostics (ASX: IDX) and digital advertising group oOhMedia (ASX: OML).
One of Donohue’s favourite picks as of May is pharmaceuticals small-cap Botanix (ASX: ASX: BOT).
The company has a a dermatology product named Sofdra that is applied in gel form to stop excessive sweating. Donohue says the product is better than the competition and is approved for sale in the large and lucrative US healthcare market. On May 19, shares in Botanix changed hands for 37 cents on a market cap of around $708 million.
“We think it’s worth multiples of the current share price and a really good one for years to come,” says Donohue.
“Softra is like applying a roll-on deodorant, so it’s far preferable and we really like the [Botanix] management team, they have runs on the board in terms of commercialising these formulations in US market so we back them to make a success of the US rollout. The prize in the US is so big at the moment that it’s the absolute focus.”
Positioning for future gains
Donohue also thinks the small-cap sector has plenty of room to bounce as interest rates are brought lower by the Reserve Bank in Australia.
As at May 19, the market is forecasting three more rate cuts in 2025, with lower rates likely to support the valuations of smaller companies and perhaps boost the soft market for initial public offerings where new companies list on the local bourse.
“We know when economic conditions slow down, smaller companies are disproportionately impacted, but the tide is starting to turn and that is flowing through to earnings in terms of [small-cap] upgrades,” says Donohue.
“So, if we see a bit of a rebound in the Australian economy and talk of interest rate cuts, we think there’s a trend starting to emerge in terms of a positive upgrade cycle for small companies.”
As to the outlook, Donohue suggests Lennox will not change much about its investment process and style that has served it well for the past eight years.
“The challenge for us is to stick to our knitting, we’ve got a tried and tested investment process we know works through cycles,” he tells Livewire.
“And [then] focusing on what the earnings of these businesses will be over the long term and using short term volatility to really capitalise on some of these opportunities. The job for investors is to come with us on the journey, on that long term view where we think ultimately they’ll be rewarded.”