Micro-Caps

@Swage_17 ,

Following discussion on CSL threads about the dispersion between the valuations of large-cap versus small-cap, below follows a listing of small-cap stocks which I have been researching, or about which I have updating my understanding, in recent months.

(Disclaimer: In several of these my family is a shareholder - either directly, or indirectly - or we could be looking to become shareholders, pending certain events/milestones).




Of course, that's a long (albeit not exhaustive) listing, and not all of them are what I'd call worthy of investment (I wouldn't outright dismiss any of them as investment prospects per se; rather, most of them are no longer what I'd consider to be cheap enough.

If I was forced to shorten that zoo of stocks to a sufficiently diversified portfolio (after 12 stocks, the diversification benefits start to decay pretty quickly, the valuation theory tell us) representing what I think represents the best combination, it would look something like this:

1 AVA
2 DDR
3 BWF/APD/ENN (One of these. All 3 are property investment managers which look similarly undervalued; I'm ambivalent )
4. FID
5. JAN
6. M7T
7. NTD
8. QFE
9. SMP
10. SP3
11. TRS
12. XRF
13. ZNO


To my way of thinking - without it constituting, or purporting to constitute - investment advice, that kind of portfolio offers an appropriate balance of Risk and Return.

Of course, like any selection of stocks, not all of those stocks are going to do what one might hope; 2 stocks might more than double, 4 might go up by 50%, 4 by just 25% , and 2 might fall by 10-20% and 1 might be a disaster and fall by 50%.

For a weighted average investment return of 30% to 40%.



PS. The part of your post (https://hotcopper.com.au/posts/46387964/single) that stood out most to me was this:
"I dont really want to invest in anything under 500m market cap due to higher risks."

I have to say, I find that to be a flawed statement because investment risk has three sources, none of which are unique to small cap stocks and insulated against when investing in large cap stocks:

1. Company-specific Risk (e.g., investing in a inferior business model or due to management mis-allocating shareholder capital)

2. Valuation Error Risk - i.e., overpaying for stocks compared to fundamental valuation.

3. Systematic Risk - i.e., Changes in market sentiment which could impact overall equity valuations.


On points 1 and 2, there is no difference between small and large caps, in terms of the conducting of fundamental research on companies which will inform those risks. The due diligence around business model risk and management effectiveness and alignment involve exactly the same process, irrespective of what the size of the company in question happens to be.

As for point 3, well there the same thing applies; no amount of analysis and research can foretell when left-field events are going to hit capital markets. And besides, when they do, it impacts large as well as small cap stocks, and in any event, provided one has conducted one's fundamental research and valuation work properly, any loss of capital will prove to be merely temporary.

Finally, the risk dissipation afforded by diversification due to the portfolio effect means that any stock-specific risk is greatly diminished in a portfolio of 12 or more stocks.