‘I’m a private investor. And when I look at stocks like yours, it seems to me that you either hit the jackpot — or you lose your shirt.
‘So, tell me…why should I invest my hard-earned in your company?’
The CEO at the podium was blindsided.
So much for softball questions from the floor.
This was just one of several blunt exchanges we heard yesterday at the Australian Microcap Investment Conference.
Today, we’re writing to you again from the conference floor at the Sofitel, in Melbourne’s CBD.
It’s been a lively, entertaining forum.
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There’s nothing like getting out of the office and off to a conference to give you a fresh perspective.
The first thing that struck us yesterday was just how fertile the small-cap sector is for private investors hunting for growth.
And the mere fact that fewer than a couple of hundred delegates showed up to one of Australia’s premier small-cap events reinforced that vibe.
It felt exclusive.
Here’s a fun way that you can think about that…
The adventurous five
You could view the field of Aussie investment prospects today like a farmer views the trees in his orchard.
Imagine one orchard has 200 apple trees, and the next has 1,720 trees.
One day, the farmer sends 100 fruit pickers out to find the juiciest apples.
95 of those fruit pickers choose to work in the orchard with only 200 trees.
Only five pickers buck the trend. They venture boldly into the orchard that offers more than 1,500 extra trees.
Which set of stock…I mean apple pickers do you think brought home more juicy apples per person that night?
Why, the adventurous five, of course!
Yes, we’re simplifying investment reality here.
But the fact is, there are far fewer investors combing the small-cap sector than there are who pore over the S&P/ASX 200 [ASX:XJO].
That’s truer now than it was before 2008’s financial crisis engulfed the world.
Tougher times for stock broking firms have forced them to cut back on small-cap stock research. So the prospects remain uncovered.
That’s great news if you have the time and risk appetite to consider small-caps.
Because not only do these stocks offer the best growth potential…many of them offer far stronger balance sheets than their large-cap brethren.
A quality we love to see
That insight came in yesterday’s keynote address from Tony Waters.
Tony runs the Ausbil MicroCap Fund. Emerging companies are his bread and butter.
Balance sheet strength is one of the first things Tony looks for in a good small-cap stock.
He pointed out that, because capital has been hard to come by for most small-cap companies over the past few years, many have been forced to make do with what they can access.
That has meant using cash flow to fund growth and reinvest in these businesses…because debt and equity have been hard to come by.
That’s bred a frugal attitude among management at many of these little companies. That’s a quality we love to see in small-caps.
Capital has been hard to come by for these companies because in the years following the global financial crisis, it was misallocated.
It’s the same kind of fervent investment that inflated the tech bubble in the late 1990s.
When commodity markets rebounded in 2010, they lifted the Aussie resource sector along for the ride. Far too much money flowed into dicey mining explorers and producers.
Many of those explorers and producers frittered that capital away. You’ll know what we’re talking about if you’ve held any underperforming small resource stocks over the past few years.
By the way, that trend could be set to reverse. If you ask our Resources Analyst Jason Stevenson, he’ll tell you a select group of resource stocks is set to soar.
Jason has just spotted four of the most exciting speculative companies trading today in the oil and gas sector. They could bring you fantastic profits, if you’re comfortable enough with the risks to invest now.
So where has that trend left small-caps?
For the most part, unloved and underfunded.
But that’s when a canny trader will take the closest look at a potential investment.
And what’s more, it looks like the four-year long freeze in quality small-cap stocks coming to market is thawing.
Something for everyone
In fact, there’s a multi-year backlog of exciting companies preparing to list on the Australian Securities Exchange.
The growth rates that these kind of stocks offer come at a price.
These companies can be hard to value accurately…and that raises the risk that you could lose money by paying too much to buy small-cap shares.
That threat means you should never invest more in any one speculative small-cap stock than you can afford to lose.
The CEO who received the thorny question I mentioned earlier said as much in his answer.
That’s to his credit. The guy runs an early-stage biotech firm with a viral treatment for cancer.
He knows his company’s stock is only suited to calculated risk-seeking investors.
But the wider microcap universe truly offers something for everyone.
A much broader diversity of industries show up in the small-cap sector than in the blue-chip index.
That’s why I focus so much attention on this sector…and it’s why some of the companies we’re seeing at this week’s conference could bring healthy returns to shareholders for years to come.
Cheers,
Tim Dohrmann+
Editor, Money Morning
The post If You Seek Growth, This Sector’s for You appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
