Professional Documents
Culture Documents
1:45pm to 2:15pm
MICROCAP
Seminar
This session highlighted ways in which to
more successfully find the hidden gems that can be
found among the micro-cap end of the market.
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Microcap Investment
solid growth profiles and high free cash flow yields, while avoiding low growth
defensives and pure-yield type companies.
The small cap sector typically outperforms large caps when risk appetite is
strong. While that might not describe the current environment there are always select
opportunities particularly in well-managed, small industrial companies with strong EPS
growth prospects and solid balance sheets.
Investors may do well to remain cautious about small companies exposed to the mining
sector, particularly if they are early-stage or carrying high debt levels. In a stronger
growth environment, when bond yields and commodity prices are typically rising,
investors can look to increase their mining exposure. Until then find the right
combination of high quality companies with attractive valuations at the right point in
the business cycle.
FUNDAMENTAL MARKET VALUATIONS
From a fundamentals perspective the Contango MicroCap Limited portfolio of 69 ASX
listed microcap stocks is demonstrating
attractiveness on a both relative and
absolute basis.
DO YOUR OWN RESEARCH
With microcaps the information is
scarce and share prices volatile.
Research
and
discipline are the
core of microcap investing where knowing a company, understanding
its operations and its industry are critical.
Limited information arises from brokers who cant recover the cost of
producing research on them and media covering better known
companies. Good stories are eventually covered but in the early stages
of a companys development, information must be sought. Herein is
the opportunity with microcaps in that disciplined investors with
clearly defined processes can find good stocks to invest in.
KNOW THE COMPANY
Fundamental and Quantitative research will never go out of style. Understanding the
constructs of and the principles behind price/ earnings, EPS growth, balance sheets and
cash flows are non-negotiable. The same with discounted cash flows- you dont have to
be able to build a DCF model, but you have to understand them. For instance, if the price
of oil goes up 20% or gold is discovered you need to be able to calculate how that will
impact share price.
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Microcap Investment
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Microcap Investment
GETTING INTO THE STOCK
When choosing stocks avoid reliance on stereotypes. Each company is unique and has a
price so dont invest in a company because of one
feature- such as it being a Rare Earths company.
Likewise dont not invest in it for the same reasons.
Look for a balance, avoid holding too many of the same
type of company and look for spread. At least 20
microcaps offers a diversified portfolio.
Know why you are investing in the company. Create a
folder for every investment you consider, build an
investment checklist and stick to it. Be rigid, disciplined
and methodical.
If you decide to invest in a stock write a paragraph detailing why you like it, why you
invested in it and at what point you will exit it. Have your trading strategies preplanned, relating to tactics for:
Getting set:
How will you accumulate your position? How might that impact share price?
Managing the investment:
What are your actions upon price falls and following negative or positive news?
Exit Strategies:
Is your eye always on the exit door? What happens as you near your target price?
SUMMARY
The sharemarket remains a medium to transfer wealth from the impatient to the patient.
There is a case to invest in Microcap companies however discipline, research and
patience is required. The lack of microcap research provides hands-on investors with the
opportunity to get ahead of the market and find quality investments at the right prices.
Microcaps can be both exhilarating and financially rewarding. Investors are reminded
that diversification is critical to ensure their portfolios are protected from those shock
events which even the best research cannot prepare for.
Astute investors who prudently allocate to MicroCap companies are well positioned to
capture the growth in these companies as they progress from micro into successful, well
known companies.
NOTE AND DISCLAIMER
This article is written as an introduction to market investing. It is NOT to be construed as providing financial advice or a statement on the
market. Microcaps are a volatile investment class and may not be suitable for your investment needs. Consult professional financial
advice before making any investment decisions. Forecasts in this article are predictive and based on numerous assumptions including
the forecast outlook for key variables and may be affected by various factors including inaccurate assumptions, risks and unforeseen
events. Accordingly, actual results may differ materially from those implied or forecasted. Contango Asset Management Limited (ABN 52
085 487 421) holds an Australian Financial Services License (AFSL #237119) restricting it to providing financial products and services to
wholesale clients only.
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