The small cap index, the S&P/ASX Small Ordinaries Index, is down 4% from this time last year as investors shun risk in favour of big stocks paying rock-solid dividends. By comparison, the index of our largest companies, the S&P/ASX 200 index, is up 8%. Reliable blue chips like Telstra are hitting record highs.
Buying a small cap that eventually becomes a big cap can make you rich – but you need foresight and loads of patience as it can take many years before a small company hits the big league.
The difficulty with analysing small companies is the lack of analyst coverage; estimating future earnings is tricky when a small company is expanding rapidly. Small companies also tend to be domestically focussed, specialising in one or two market segments. A lack of earnings diversity can easily set a small company back in tough times.
In this exercise we searched for companies with a market cap under $150 million, trading below $1.00, with a minimum 2 Year Earnings Growth Forecast of 50%. Below are 8 stocks that pass the test:
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Specialty Fashion Group
K2 Asset Mgmt
Specialty Fashion Group (SFH) is a multi-channel retailer of women’s fashions. The company is the largest outlet in Australia with operations in New Zealand and the United States. Specialty Fashion claims to sell “a garment every second” through over nine hundred stores and seven online businesses worldwide.
SFH is up almost 10% year over year and is currently trading close to its 52 Week High. Recent positive management comments at its November AGM gave the stock a healthy boost, as you can see from the company’s one year price chart:
Specialty Fashion has a Price to Earnings Growth ratio of 0.27 and an equally impressive Price to Sales Ratio of 0.21. Following the AGM, Credit Suisse upgraded Specialty Fashion to NEUTRAL from UNDERPEFORM and upped the target price to $0.60 from $0.35. The share price has already broken through the target price.
Bionomics (BNO) is a stgelopment stage biopharmaceutical company working on treatments for cancer and central nervous system disorders through three proprietary technology platforms. The company has one central nervous system treatment in Phase II clinical trials with partnership arrangements for distribution and marketing already in place; two more treatments are in the Discovery Phase. There are three cancer treatments underway; two in discovery and one in Phase III clinical trials with a partnership in place. In addition, the company has one treatment for immune system disorders in the Pre-Clinical Phase.
There is just one analyst covering Bionomics with a STRONG BUY recommendation. NPAT for BNO is forecasted to rise to $95.4 million in 2014 from a loss of $6.8 million in 2013. The 2014 EPS estimate is $0.252. As is the case with most biotechs, its share price is volatile. Here is a two year price chart for BNO:
K2 Asset Management Holdings Ltd (KAM) is a fund manager serving institutional and retail investors in Australia. The company has three principal funds covering Australia, the Asia-Pacific region, Europe and the US.
Here is a two year share price chart for KAM:
KAM is another small cap with no major analyst coverage. According to Thomson IBES, one analyst has a STRONG BUY rating on KAM – forecasting NPAT rising to $5.4 million in 2013 from negative territory in 2012; and then doubling to $11.4 million in 2014.
Coffey International Limited (COF) has three operating divisions offering services to a variety of corporate customers. The largest is the Geosciences Division which provides highly technical services from hydro geologists to environmental scientists. This division’s primary customers are in mining, energy and infrastructure around the world. The International Division provides consulting and training services to similar markets. The Project Management Division works in commercial and residential property, urban restgelopment, and other infrastructure projects in Australia as well as New Zealand and South Africa.
With a P/EG Ratio of only 0.03 and 76.8% expected earnings growth over 2 years, the company is attractive on paper. The Price to Book Ratio of 0.62, however, indicates investors are unconvinced as the stock trades below book value.
Costly acquisitions to pursue diversified markets prior to the GFC cost the company – its debt levels soared as global demand collapsed. The shares were trading at $3.50 in January 2009. Here is its one year chart:
Tissue Therapies (TIS) is a biotechnology company whose claim to fame is a treatment called VitroGro® ECM. It works on difficult to heal wounds.
The treatment is in clinical trials and the company has marketing partners. TIS claims sales estimates of $1 billion per year in the US market alone.
Investing in TIS requires nerves of steel; in May 2012 the share price shot up almost 29% in a single day, while delays in news on the clinical trials drove the share price down in late June; the stock has stayed on its volatile downward trajectory ever since. Here is its one year price chart:
Clarius Group (CND) has seen a 35% drop in its share price year over year. The company provides a wide variety of recruitment and employment services in a very challenging environment. Clarius serves companies and governments in the Asia Pacific Region with an “A to Z” array of help, including accounting, administration, information management, information technology, recruitment and staffing.
The company has served its shareholders well in the past. Its current Book Value per Share is $0.88 and you can buy shares for $0.31. With a 5 Year expected P/EG of 0.23 and a Forward P/E of 5.13 according to Thomson/Reuters, this stock’s fundamentals are attractive. Note the pre-GFC share price performance of CND in the following ten year chart:
Dyesol (DYE) is for solar power enthusiasts. Dyesol engages in the industrialisation and commercialisation of dye solar cell technology.
What is Dye Solar Cell Technology? It’s called third generation solar technology and has the potential to replace traditional silicon based solar cells used today. Dye solar cells “mimic” the natural process of photosynthesis with a little help from nanotechnology. You do not need to fully understand how this all happens to appreciate the potential here.
Dyesol is considered the world leader in translating the technology into practical industrial applications. The company makes the chemicals, equipment and components used by researchers and manufacturers globally. These institutions are large in scale with the resources needed to move this technology from theory to practice.
Tata Steel, one of the largest steel producers in the world, is partnering with Dyesol to incorporate these new solar cells into steel roofing materials.
Prior to the onset of the GFC, Dyesol hit an all time high of $2.25 a share. Since that time solar power has lost its shine globally as silicon prices have added to existing doubts about the cost effectiveness of solar. Today the share price hovers around $0.14, down almost 55% year over year. To put that into context, US based First Solar and China’s Suntech Power and Yingli Green Energy are down between 40 and 60%.
With a market cap of only $6 million and a stock price of a penny, why is Antaria (ANO) in our table? The answer is technology. The company was born out of research efforts in advanced materials and powders technologies stgeloped at the University of Western Australia. Antaria struggled with successfully translating the technological innovations into commercial reality. Following a capital raising in September 2011 Antaria systematically reviewed its operational focus to limit its activities to commercially viable offerings.
As of right now, they have two strong candidates – a cosmetic product for sunscreen protection called ZinClear-IM. The second is Allusion, another cosmetic product. Allusion is based on the company’s aluminum oxide plating technology and is meant to hide the effects of aging. The company is working on other applications of the technology including automotive paints.
The company has a marketing partner in place for Allusion and an agreement in the works for ZinClear-IM. You may have heard of these partners. Marketing rights for Allusion have been granted to Merck of Germany and Dow Chemical is interested in ZinClear. Big players like Dow and Merck do not typically enter into agreements with companies that have nothing to offer.
ANO may not yet be a stock to buy, but it is definitely one to watch. Here is a one year price chart for the two tech companies in our table – Dyesol and Antaria:
Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.