Introduction to investing in small caps
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Introduction to investing in Small Caps. Shaun van den Berg PSG Online. Definition. How do we define small cap shares? In the US, the generally accepted definition is a share who has a market capitalization between $250-million to $1-billion.

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Introduction to investing in small caps

Introduction to investing in Small Caps

Shaun van den Berg

PSG Online


Definition

Definition

  • How do we define small cap shares?

    • In the US, the generally accepted definition is a share who has a market capitalization between $250-million to $1-billion.

    • At PSG Online, we consider any share that is NOT in the top 100 as a small cap share.


Definition1

Definition


Definition2

Definition


Popularity or lack of

Popularity (or lack of)

  • Unfortunately, those definitions do not explain why small cap shares are so popular.

    • For the novice trader, or someone with a small portfolio, small cap shares can appear to be the perfect investment. 

    • Small cap or “Penny shares” have a bad name because most people who "play the pennies" are nothing more than speculators & gamblers, hoping to strike it rich with that one share that skyrockets.


Sophisticated investors

Sophisticated Investors

  • Sophisticated investors should maintain a majority of their share portfolio in large caps

    • Looking for companies who are able to continually raise their dividend payouts.

  • A small part, possibly as high as 10%, would be allocated for small cap shares.

  • This gives a balanced approach for your portfolio.

    • Should you come across a small cap share which returns 100%, it is going to contribute nicely to your all round share portfolio.

    • On the other hand, if some small cap shares go lower, your whole share portfolio would not experience a significant hit.


Capitec

Capitec

03/09/2010

Closing price 13350c

5000 shares @13350c = R667 500

R667 500 capital gain + R33 625 dividends = R701 125

7 317%

Founded in 1999

Listed on 18/2/2002

Issued 84 122 113 shares

Market Capitalisation: R151-million(R11-billion)

18/02/2002

Closing price 180c

R10 000 = 5000 shares @180c = R9 000


Grindrod

Grindrod

03/09/2010

Closing price 1569c

31 000 shares @1569c = R486 390 capital gain

Founded in 1966

Listed on 1986

Issued 463 681 980 shares

Market Capitalisation: R146-million

(R7.1-billion)

4 880%

26/03/1987

Closing price 0.315c

R10 000 = 31 000 shares @0.315c = R9 765


Cashbuild

Cashbuild

03/09/2010

Closing price 6925c

2500 shares @ 6925c = R173 125 capital gain

1 722%

Founded in 1978

Listed on 1986

Issued 25 805 347 shares

Market Capitalisation: R98-million (R1.7-billion)

22/05/1987

Closing price 380c

R10 000 = 2500 shares @380c = R9 500


Why small caps

Why Small Caps?

JSE Small Caps Index

JSE Top 40 Index

Stemmed earnings losses to 22% -26%

Increased by 55.77%

  • Earnings fell on average 77% last year

  • Up about 48.49% since its three year lows last March

  • PE ratio of 13.86 times

  • DY of 3.26%

  • PE ratio of 17.12 times

  • DY of 2.14%


Jse top 40 jse small cap index

JSE Top 40 & JSE Small Cap Index


Jse top 40 jse small cap index1

JSE Top 40 & JSE Small Cap Index


Jse small cap index relative

JSE Small Cap Index Relative


Why small caps1

Why Small Caps?

  • Smaller & more nimble to exploit new opportunities/ changes in the market

  • Better position to generate earnings growth

  • Hold relatively more upside potential on a valuation basis

  • Institutional funds are limited from owning them

    • Few analysts follow them

    • News flow is poor - information less likely to be reflected in share prices

  • Easier to analyse

    • Financial statements & business models

    • Operate in one line of business

    • Have fewer competitors

    • Have a few major customers

  • Cash generative

  • Not detracted by Rand

  • Domestic focus

  • Natural diversification


Company analysis

Company Analysis

Growth & Health & Valuation


Performance

Performance


Fundamental analysis checklist

Fundamental Analysis Checklist

P/E < 17

PEG < 75%

PRICE/NAV < 2

Undervalued

ROE % > 15%

Profitable

Risk Management

Interest Cover> 3 times


Value

Value

PEG = P/E Ratio / Forecast average growth over next 5 years

(Earnings growth rate must be higher than the P/E ratio at time of investing)


Quality

Quality


Onelogix group

OneLogix Group


Onelogix group1

OneLogix Group


Adaptit

AdaptIT


Adaptit1

AdaptIT


Arb holdings

ARB Holdings


Arb holdings1

ARB Holdings


Esorfranki ltd

EsorFranki Ltd


Esorfranki ltd1

EsorFranki Ltd


Protech khuthele holdings

ProtechKhuthele Holdings


Protech khuthele holdings1

ProtechKhuthele Holdings


Summary

Summary

  • Small Cap shares (Any share that is NOT in the top 100)

    • PE ratio of 13.86 times

    • Dividend Yield of 3.26%

    • Huge potential gains

  • Smaller & more nimble

  • Natural diversification for a portfolio

  • Easier to analyse & understand

  • Better position to generate earnings growth


Conclusion

Conclusion

  • Do some homework first

  • Takes one takeover / one big investment

  • Remember:

    • Capitec

    • Cashbuild

    • Grindrod

  • Management Comments …


Thank you

Thank You

[email protected]

(011) 996 5200


Psg online technical analysis research information disclaimer

PSG Online Technical Analysis & Research Information Disclaimer

  • This publication has been issued by PSG Online. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice.

  • Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising here from or in consequence hereof.

  • Securities, financial instruments or strategies mention herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and investment objectives. The employees of PSG Online may from time to time own securities mentioned herein.


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