How To Identify Opportunities In A Small-Cap World?

  • Jul 05, 2019 AEST
  • Team Kalkine
How To Identify Opportunities In A Small-Cap World?

Small cap is a term commonly used in stock market which emphasises on defining the type of the company based on its market capitalisation. So here cap stands for capitalisation.

In simple terms, small cap stocks are the companies with relatively small market capitalisation. It should be understood that the market capitalisation is a worth of the company which is evaluated by multiplying the company’s stock price by its shares outstanding in the market. There is no standard range to define the market capitalisation of the small-cap companies but usually it includes companies with few hundred million dollars of market capitalisation, below $2 billion.

In Australia, the S&P/ASX Small Ordinaries index (XSO) outlines the benchmark index for companies smaller than the members of the S&P/ASX300 index. The index is widely used to skim through some small cap companies listed on the Australian Securities Exchange.

Small cap have a greater growth potential but also confers higher risk and volatility compared to the large-cap companies. One of the significant advantages of investing in small cap companies is the opportunity to beat institutional investors as funds usually not focus on small-cap companies in their portfolio and are also governed with certain limitations.

Let’s discuss how to identify opportunity in a small-cap world?

Screen the hidden-gem using research reports and online tools: Research reports and some online tools could potentially help the investors to identify the small-cap companies that have a great growth prospect. Investors can take benefits from the comprehensive research reports of Kalkine to have a deep understanding of the company, its historical performance, growth over the period compared to industry player, and future growth potential.

Keep a close track of volatility: In stock market there is nothing permanent and so is the case with small-cap. The small-cap are usually considered more volatile and riskier compared to mid-stocks and large stocks. Therefore, its always advisable to pay close to the volatility of the stocks, its price movement pattern, and the market conditions to which it reacts the most.

Learn about the business model of the company: If you are not punting on the stock for intraday trade and planning to buy it with long-term perspective, its always good to know about what you are investing in; what’s the business model of the company? Since small-cap have great market exposure for growth, a strong business model, having a great demand of its product and services in future, could take the company to a long run possibly turning it into a mid-cap through large-cap to become the blue-chip.

Make sure that you are not the only one running after the stock: The market is led by sentiment which ultimately decides the stock price movement. Its essential to pay attention that how many players in the market are considered about the stock, its business and growth. The news, analysts report, trade volume, and online discussion forums help you evaluate that you are in the right director or not.

Let’s have a lens over some famous ASX-listed small-cap companies:

Nanosonics Limited (ASX: NAN)

Healthcare company Nanosonics Limited is one good example of small-cap companies that has a market capitalisation of $1.63 billion as at 5 July 2019.

Nanosonics has reported a record first half sales of $40.7 million, reflecting a growth of 36% on the previous corresponding period and 33% on the prior year. Operating profit before tax was $11.0 million for the half year ended 31 December 2018, up 195% on prior corresponding period and 493% on prior half.

The company’s high-growth performance was driven by the successful launch of its proprietary technology trophon®2 in Europe, North America and Australia in the September 2018 quarter. It was coupled with strong installed base growth with also consumables and services sales substantially up.

NAN stock price last traded at $5.400 on 5 July 2019 with the price to earnings multiple of 152.680x. Over the past one year, the stock has gone up by 77.70% including a year-to-date return of 94.96%.

Collaborate Corporation Limited (ASX: CL8)

Collaborate Corporation Limited is a consumer discretionary company worth $8.25 million as per the market capitalisation of the company on 5 July 2019. Collaborate concluded the March 2019 Quarter recording 48% decrease in Net Cash Used in Operating Activities vs March 2018 Quarter 30% decrease. It represents effective cost control in a period that experienced demand challenges and significant resources allocated for the launch of Carly vehicle subscription at the end of the Quarter.

The company also achieved a 46% decrease in Staff Costs vs the March 2018 Quarter and 38% decrease vs the December 2018 Quarter. It received $325,000 R&D Tax Incentive Refund relating to FY18.

CL8 last traded at $0.010. Over the past 12 months, the stock declined by 49.06% but has registered an attractive upside of 42.86% in a previous month.

Bellamy’s Australia Limited (ASX: BAL)

Infant formula company Bellamy’s Australia Limited holds a market capitalisation of $955.69 million as at 5 July 2019. Currently, the company is the transformational phase in terms of its brands and marketing with some new product upgrade now in market which includes the world’s leading levels of DHA (Omega 3).

BAL1H19 financial performance compared to 1H18

Looking into FY2019, the company expects to report a group revenue with the range of $275-300 million, reflecting the slower trading prior to the rebrand. Normalised Group EBITDA is expected to lie between 18-22% of revenue for FY19.

BAL stock price dropped by 0.83% to end the week at $8.360 on 5 July 2019. Its PE stands at 33.860x. Over the past 6 months, the stock has witnessed a positive price change of 15.66% including an upside of 1.57% in a past month.

Vango Mining Limited (ASX: VAN)

Gold exploration and development company Vango Mining Limited is focussed on its 100%-owned Marymia Gold Project in the Mid-West region of Western Australia. It plans to develop the project’s assets into a significant, long term gold mining operation.

It recently reported a high-grade gold intersection from the drilling program undertaken within its Marymia Gold Project. The intersection was identified at the Wedgetail Prospect, 300km northeast of Meekatharra in Western Australia.

VAN stock price last traded at $0.165 on 5 July 2019. The company’s market capitalisation stands at $103.69 million. Over the past 5 years, the stock has gone up by 175.00% with a positive price change of 17.86% in the past three months.

There are many small-cap listed stocks on ASX coming from diversified industries. It’s always an ideal approach to identify, analyse and then act to enjoy decent returns over time.

Also Read: A Glance at the Performance of Small Caps and Transportation Stocks


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