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Price-earnings ratio
14.3
16.4
14.6
29.4%
14.5%
5.3%
Yield
3.3%
3.9%
4.7%
Return on equity
14.5%
13.1%
16.2%
11.0%
22.2%
36.2%
0.58
1.06
0.97
Big
promise
Story BOYD PETERS
Getting in
getty images
n mid-2014, Commonwealth
Bank was worth more than the combined value of every ASX company
outside the S&P/ASX 200. Out of
nearly 2000 companies listed on the
ASX, the 13largest had a combined market cap
greater than that of all other listed companies.
This extreme concentration leads many
investors to miss those small company and
microcap opportunities that can provide
diversification, opportunity and performance
to their investment portfolio.
Generally, most sharemarket investors with
a time horizon beyond five years could comfortably allocate 5%-15% of their portfolio to
microcaps. Some investors may be surprised
to discover they have that much invested in
one or two large-cap stocks alone.
For 2014-15, microcap investment manager
Contango sees solid but not stellar growth of
around 3% as the economy transitions from
mining to non-mining investment and consumption. In this environment, the preference
is for companies with solid growth profiles
and high free-cash-flow yields, while avoiding low-growth defensives and pure yieldtype 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 earnings per share (EPS)
growth prospects and solid balance sheets.
Investors may do well to remain cautious
about small companies exposed to mining,
particularly if they are at an early stage or have
large debt. In a stronger growth environment,
where bond yields and commodity prices typically rise, investors can increase their mining
exposure. Until then, find a combination of
high-quality companies with attractive valuations at the right point in the business cycle.
From a fundamentals perspective, the micro-
When choosing stocks, dont rely 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.
But dont not invest in it for the same reason.
Look for a balance and avoid holding too many
of the same type of company. A diversified
portfolio holds at least 20 microcaps.
Know why you are investing in the company. Create a folder for every investment
you consider, build an investment checklist
(an example at right) and stick to it. Be rigid,
disciplined and methodical. If you decide to
showtime in
Melbourne
investor checklist