Small Caps to Lead the Way in 2009
Probably the biggest story this week was the end of what was destined to be the merger of the century. Aside from all the why's and wherefore's about what went wrong with the merger, it also elicited the greatest number of marriage/engagement/divorce metaphors in the history of journalism.
That is quite some feat. We write of course, on the subject of the BHP Billiton/Rio Tinto story.
Aside from all the benefits that a takeover would have brought to BHP, the big point to take from it is that even mega companies are reluctant to add debt to their books at the moment. And it also gives an indication that if it is troublesome for the likes of BHP and Rio to raise money in this market, think about the smaller companies and how they must be faring.
An example of this is one of the companies in our Australian Small Cap Investigator (ASI) portfolio. Last week it released details of a new joint venture deal it had entered into. Three days later the window closed for shareholders to pick up more stock in a capital raising.
The result was that the company raised less than 40% of the capital is was hoping for. If it was twelve months ago we are sure they would have raised the full amount. Fortunately, the company in question does have a Plan B. But many small companies out there don't. If they can't borrow from banks and can't raise additional capital from shareholders, it makes it very hard for smaller companies to invest in growing their business.
On the other hand, that is one of the reasons why rather than stepping back from looking at new investments for ASI, we are actually ramping up the coverage in the New Year.
The credit markets will eventually recover, but it may be slow. However, even before this becomes obvious to the market many small cap companies will have already taken advantage and should surge ahead in price.
In our view, we believe the next six months will be the best time in years to pick up undervalued small cap companies.
Kris Sayce
for The Daily Reckoning Australia
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
Comment by Greg Atkinson on 29 November 2008:
Kris I agree with your comments about the small caps but would add I like small caps with little or no debt. (because they are small caps that can eat other small caps)
One of my picks is Adcorp (AAU). Mind you I have held shares in the company for years and have not seen a capital gain yet
Still they do pay a nice dividend and have little or no debt.