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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 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. • At PSG Online, we consider any share that is NOT in the top 100 as a small cap share.
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 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 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 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 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? 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%
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 Growth & Health & Valuation
Fundamental Analysis Checklist P/E < 17 PEG < 75% PRICE/NAV < 2 Undervalued ROE % > 15% Profitable Risk Management Interest Cover> 3 times
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)
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 • Do some homework first • Takes one takeover / one big investment • Remember: • Capitec • Cashbuild • Grindrod • Management Comments …
Thank You shaunvdb@psgonline.co.za (011) 996 5200
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