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Introduction to investingIntroduction to investing in Small Caps in Small Caps
Shaun van den BergShaun van den Berg
PSG OnlinePSG Online
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DefinitionDefinition
• How do we define small cap shares?– In the US, the generally accepted definition
is a share who has a market capitalization between $250-million to $1-billion.
– At PSG Online, we consider any share that is NOT in the top 100 as a small cap share.
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DefinitionDefinition
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DefinitionDefinition
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Popularity (or lack of)Popularity (or lack of)
• Unfortunately, those definitions do not explain why small cap shares are so popular.– For the novice trader, or someone with a
small portfolio, small cap shares can appear to be the perfect investment.
– Small cap or “Penny shares” have a Small cap or “Penny shares” have a bad bad name name because most people who "play the because most people who "play the pennies" are nothing more than speculators pennies" are nothing more than speculators & gamblers, hoping to & gamblers, hoping to strike it rich with that strike it rich with that one share that skyrockets.one share that skyrockets.
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Sophisticated Investors • Sophisticated investors should maintain a majority of
their share portfolio in large caps – Looking for companies who are able to continually
raise their dividend payouts. • A small part, possibly as high as 10%, would be
allocated for small cap shares. • This gives a balanced approach for your portfolio. – Should you come across a small cap share which
returns 100%, it is going to contribute nicely to your all round share portfolio.
– On the other hand, if some small cap shares go lower, your whole share portfolio would not experience a significant hit.
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CapitecCapitec
R10 000 = 5000 shares @180c = R9 000
5000 shares @13350c = R667 500
7 317%
R667 500 capital gain + R33 625 dividends = R701 125
Founded in 1999Founded in 1999Listed on 18/2/2002Listed on 18/2/2002
Issued 84 122 113 sharesIssued 84 122 113 sharesMarket Capitalisation: R151-millionMarket Capitalisation: R151-million
(R11-billion)(R11-billion)18/02/2002
Closing price 180c
03/09/2010Closing
price 13350c
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GrindrodGrindrod
R10 000 = 31 000 shares @0.315c = R9 765
26/03/1987Closing
price 0.315c
31 000 shares @1569c = R486 390 capital gain
Founded in 1966Listed on 1986
Issued 463 681 980 sharesMarket Capitalisation: R146-million
(R7.1-billion)
4 880%
03/09/2010Closing
price 1569c
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CashbuildCashbuild
2500 shares @ 6925c = R173 125 capital gain
22/05/1987Closing
price 380c
Founded in 1978Founded in 1978Listed on 1986Listed on 1986
Issued Issued 25 805 347 sharessharesMarket Capitalisation: R98-million Market Capitalisation: R98-million
(R1.7-billion)(R1.7-billion)
1 722%
R10 000 = 2500 shares @380c = R9 500
03/09/2010Closing
price 6925c
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Why Small Caps?Why Small Caps?
JSE Small Caps IndexJSE Small Caps Index
• Earnings fell on Earnings fell on average average 77% 77% last yearlast year
• Up about Up about 48.49%48.49% since its three year since its three year lows last Marchlows last March
JSE Top 40 IndexJSE Top 40 Index
• Stemmed earnings losses to 22% -26%
• Increased by 55.77%
•PE ratio of PE ratio of 13.8613.86 times times•DY of DY of 3.26%3.26%
•PE ratio of PE ratio of 17.1217.12 times times•DY of DY of 2.14%2.14%
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JSE Top 40 & JSE Small Cap IndexJSE Top 40 & JSE Small Cap Index
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JSE Top 40 & JSE Small Cap IndexJSE Top 40 & JSE Small Cap Index
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JSE Small Cap Index RelativeJSE Small Cap Index Relative
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Why Small Caps?Why Small Caps?
• Smaller & more nimble to exploit new opportunities/ changes in the market
• Better position to generate earnings growth
• Hold relatively more upside potential on a valuation basis
• Institutional funds are limited from owning them
– Few analysts follow them
– News flow is poor - information less likely to be reflected in share prices
• Easier to analyse– Financial statements &
business models– Operate in one line of
business– Have fewer competitors– Have a few major
customers• Cash generative• Not detracted by Rand• Domestic focus• Natural diversification
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Company AnalysisCompany Analysis
Growth & Health & ValuationGrowth & Health & Valuation
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PerformancePerformance
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Fundamental Analysis ChecklistFundamental Analysis Checklist
UndervaluedUndervalued
Risk ManagementRisk Management
ProfitableProfitable
P/E < 17P/E < 17PEG < 75%PEG < 75%
PRICE/NAV < 2PRICE/NAV < 2
ROE % ROE % > 15%> 15%
Interest CoverInterest Cover> 3 times> 3 times
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ValueValue
PEG = P/E Ratio / Forecast average growth over next 5 years
(Earnings growth rate must be higher than the P/E ratio at time of investing)
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QualityQuality
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OneLogix GroupOneLogix Group
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OneLogix GroupOneLogix Group
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AdaptITAdaptIT
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AdaptITAdaptIT
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ARB HoldingsARB Holdings
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ARB HoldingsARB Holdings
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EsorFranki LtdEsorFranki Ltd
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EsorFranki LtdEsorFranki Ltd
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Protech Khuthele HoldingsProtech Khuthele Holdings
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Protech Khuthele HoldingsProtech Khuthele Holdings
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SummarySummary
• Small Cap shares (Any share that is NOT in the top 100)– PE ratio of PE ratio of 13.8613.86 times times– Dividend Yield of Dividend Yield of 3.26%3.26%• Huge potential gains
• Smaller & more nimble• Natural diversification for a portfolio• Easier to analyse & understand• Better position to generate earnings growth
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ConclusionConclusion
• Do some Do some homeworkhomework first first
• Takes one takeover / one big investmentTakes one takeover / one big investment
• Remember:Remember:– Capitec Capitec – CashbuildCashbuild– GrindrodGrindrod
• Management Comments …Management Comments …
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PSG Online Technical Analysis & Research Information Disclaimer
• This publication has been issued by PSG Online. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice.
• Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising here from or in consequence hereof.
• Securities, financial instruments or strategies mention herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and investment objectives. The employees of PSG Online may from time to time own securities mentioned herein.