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Smaller companies Peter Switzer likes

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One thing I’ve personally learnt this year is the power of small cap companies to drive your portfolio’s value higher. This revelation makes me even more committed to the idea of a core and satellite approach to investing.

I have to confess to being more core than satellite in my investing in the past, and that means  reducing my potential exposure to the big alpha (above market)  returns that can come out of riskier stocks.

To add potential higher returns (as many of you would’ve noticed over the years), I recommend buying quality companies when the stock market dips and is irrationally selling off or simply selling off by too much. That investing style means I always end up with great quality companies bought at a great price. And provided I’m a long-term investor, I get my rewards over time. However, satellite-type smaller companies can give you huge returns in the short term, as my recent experience with our small cap conference has shown me.

Late last year and then early this year we experimented and held small cap conferences in Sydney, which had attendance levels around 200-300. This contrasts with our Investor Strategy Day conferences that attract nearly a 1,000!

Like me, many investors like the bigger cap and well-known companies. But after two brushes with sometimes unknown small companies, I’m becoming more open to more diversification on a smaller scale.

I asked one of my team, Harry, to look at the 33 companies that presented at the conferences, or made a video for one of our master classes to see how they performed. This was the scoreboard:

  1. Scidev (SDV) +100%
  2. EM vision (EMU) +600%
  3. Recce Pharmaceuticals (RCE) +300%
  4. Novonix (NUX) +225%
  5. Imagion Biosystems (IBX) +400%
  6. MyFiziq (MYQ) + 480%
  7. Whitehawk (WHK) +100%
  8. Antisense Therapeutics (ANP) +20%
  9. Jenois Mining(JRU) +20%
  10. Kazia Therapeutics (KZA) +27%
  11. Hazer Group (HZR) +90%

That was a strike rate of one in three and certainly has me champing at the bit to see who shows up for our next small cap conference, which is on October 30 and because of this damn pandemic, it will be a virtual/online conference. But it is not all bad news because it means more people are likely to attend and see the presentations because you don’t have to physically show up to get the inside info on some interesting companies.

I say “inside info” because the mainstream business media often ignores the smaller companies unless there is a controversial development or their share price goes ballistic.

For example, Recce Pharmaceuticals (RCE), whose share price has spiked 300%, was linked to Coronavirus work and CSL, and its rising share price was helped by media attention, which put this interesting company on a wider audience’s radar screens.

Similarly, the Hazer Group (HZR), which plays in the increasingly popular alternative energy space, has also enjoyed media attention and I’m sure that’s helped its share price.

The Hazer Process is a low-emission hydrogen and graphite production process that uses iron ore to convert natural gas and methane feedstocks into hydrogen and high-quality graphite.

“With the completion of this funding package, Hazer is strongly positioned to construct, commission and operate our Commercial Demonstration Project, a major milestone in scaling up the Hazer technology,” Chairman Tim Goldsmith commented.

Of course, what goes up can come down but from my point of view after the conference, those two companies were the two that drew a lot of attention from the attendees.

Another one that got me interested was one co-founded by ex-All Black and Fairfax CEO, David Kirk, called Bailador BTI). Apart from captaining the All Blacks to win the World Cup in 1987, he’s a Rhodes Scholar with degrees in Medicine from Otago University, and Philosophy, Politics and Economics from Oxford University.

This company invests in tech companies, such as lendi and SiteMinder, which is the world leader in hotel channel management and distribution solutions for online accommodation bookings.

The Coronavirus would’ve caused the company problems, so I bought in at the bottom of the crash and gee it has rebounded!

 

Bailador (BTI)

At the time of the conference I thought BTI looked fully priced short term but I was thinking about it as a more medium-term investment. However, the Coronavirus crash brought them back on my radar screen. Right now, they are not back at the $1.12 price they were at before the market dived but they’re heading in the right direction, effectively resuming the uptrend that was there before the pandemic hit stocks.

And that’s the point I want to make about opening yourself up to smaller cap companies — you actually can find some interesting businesses that could be the Appen, Altiums and Afterpays of the investing world.

I remember five years when Roger Montgomery would talk to me on my Sky Business TV program about an Aussie company that made circuit boards for big US tech companies and I didn’t initially let my dollars follow that great story and see the early growth I missed out on!

 

Altium (ALU)

I recently advocated looking at my ZEET stocks — that’s Zip, EML Payments, Elmo Software and Tyro — and yes I’m on board with these as nice little satellite investments to hopefully give some alpha to my core investments.

But a word of warning — these are more risky plays, so don’t go mad and over-invest in them. So far I’ve been lucky to benefit from the timing of buying after the crash but who knows what is likely to happen to these companies in the short term? Happily I think they’re  all businesses with potential and that’s a good start.

Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531). All prices and analysis at 12 October 2020. This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.