Australia has one of the world’s most lopsided stock markets.
Eight stocks tie up almost half of its $1.5 trillion value.
You know their names.
You can’t open a newspaper without being subjected to a story about one of the big four banks, two supermarket retailers, the big miner and the dominant telco.
But just because stocks like National Australia Bank Ltd [ASX:NAB], Commonwealth Bank of Australia [ASX:CBA], Westpac Banking Corp [ASX:WBC], Australia and New Zealand Banking Group ltd [ASX:ANZ], Wesfarmers Ltd [ASX:WES], Woolworths Ltd [ASX:WOW], BHP Billiton Ltd [ASX:BHP] and Telstra Corporation Ltd [ASX:TLS] are big, doesn’t mean these companies are a reliable source of capital growth.
Free Reports:
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
Get our Weekly Commitment of Traders Reports - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
In fact, the larger most companies grow, the harder it becomes for their share prices to keep rising.
What’s more, these eight stocks are pored over by so many analysts, investors and commentators, that it’s nigh-on impossible for any punter to find an edge.
But if you look to the other end of the market — away from the herd — exciting growth stocks abound.
That’s why this week, your editor attended the Australian Microcap Investment Conference in Melbourne’s CBD.
The conference reminded me how much is going on beneath the surface of Australia’s financial sector.
You just have to look past the big four banks to gain exposure to some great trends.
Two stocks in particular — one fancy, one simple — jumped out at us…
A fascinating alternative
We caught up with Mark Sowerby on Wednesday morning. Mark is the managing director of Blue Sky Alternative Investments Ltd [ASX:BLA].
We’ve followed Blue Sky for some time now, and Mark presented to the throng of conference delegates on Tuesday. So we knew the company’s story was intact. But it’s always worth digging a little deeper into an interesting stock.
You might be unfamiliar with Blue Sky. It’s Australia’s only listed diversified alternative asset manager. Blue Sky invests in real estate, private equity, real assets and hedge funds.
35 floors above the Paris end of Melbourne’s Collins Street seemed as good a place as any to learn about a fast-growing asset management firm.
So, over a coffee with a knockout view of the Yarra River, Mark brought us up to speed.
Blue Sky’s business is fascinating — not that you’ll hear much about it in the mainstream press.
Because Blue Sky invests across four alternative asset classes, it can take you a while to get your head around the intrinsic value of the business.
But having four arms cushions Blue Sky if any one segment’s performance slows down.
Mark is proud of the prosperity his company’s expansion capital can bring to investee companies.
One of these — Viking Rentals — is a great example.
Viking is a fast-growing Brisbane-based portaloo hire company.
When Blue Sky invested a couple of million dollars in early 2007, Viking operated just 150 toilets.
That figure has since grown to more than 4,000.
When the time comes to exit, Blue Sky should realise millions of dollars in profit on this investment.
This stock provides a level of growth and exposure to alternative assets that you can’t find anywhere else in the Aussie stock market — particularly not among the big four banks.
Of course, that growth and exposure come with risk.
Just as there are no free lunches in life, you can’t reap healthy rewards from the share market without accepting the risk that your stake will decline if things don’t go right.
Educating Aussies about the opportunities in alternative assets will take time.
Mark and his team understand that.
Investing in small financial stocks takes patience…but the rewards can be ample.
The strong Queenslander
Not all small financial stocks are as complex as Blue Sky.
In fact, sometimes the simplest business models can be among the most compelling.
That’s what struck me when the managing director of Wide Bay Australia Ltd [ASX:WBB], Martin Barrett, presented to us on Wednesday.
Wide Bay is Australia’s fourth-largest building society. It manages a $2.6 billion loan book from Bundaberg, Queensland.
With a history stretching back half a century, Wide Bay enjoys a strong customer base and solid links to the capital markets. Funding is not an issue.
New management has improved the company’s relationship with home loan brokers. That has underpinned pleasing growth in loan approvals. Meanwhile, the business banking arm is winning big pieces of work from the major banks.
A key obstacle to investing in Wide Bay — as is so often the case with small-caps — is the limited liquidity in the market for its shares.
Placing an order to buy a small-cap stock is not as easy as buying a blue-chip bank or supermarket. You can’t just tick the ‘at market price’ box on your order screen and click ‘buy’.
On certain days, it would be hard for you to buy a decent-sized parcel of Wide Bay for yourself without moving the stock price — let alone the volume that even a small institutional investor would consider buying.
That means you have to be tactical when considering a purchase in stocks like these.
You shouldn’t let a lack of liquidity suck you into paying too much for a stock.
In time, people tend to cotton on that a small-cap growth story is worth their investment.
When that happens, long-term shareholders see bidders willing to pay a good price for their stock, and some become sellers.
That’s when a trickle of liquidity can turn to heavy flow.
When you see that happening, you can take it as an opportunity to buy that great little growth stock that you’ve had your eye on.
Until that flow comes, small-cap companies do what they can to boost their profile and drum up liquidity.
Presenting at events like this week’s microcap conference is one of the most effective ways these companies can do that.
And if you can buy into the right small-cap story just before the liquidity and interest in its shares picks up — you could bag returns far greater than what you find among large-caps.
Cheers,
Tim Dohrmann
Editor, Money Morning
The post Why Patience Pays Off With Small-Caps appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
