How to pick Small and Microcaps?
You ask, well how do I invest in small and micro cap stocks? This can be difficult, even for seasoned investors. There are lots of small and micro cap companies all spruiking fabulous stories but for the part-time or side gig investor, it can difficult to work out which ones are “real”. Things we look for are reasonable valuations, so there is a buffer on price; strong balance sheets; well-regarded management and board; skin in the game from management and directors are just a few metrics.
Why active management when investing in Small and Microcap stocks?
Due to strong information asymmetry, Small and Microcap markets offer investors with strong research capabilities the ability to take advantage of mispricing situations between share price and company valuations. Astute investors know that taking advantage of professional teams, specifically looking at small and microcaps companies on a daily basis, and investing in a diversified portfolio of companies can increase the likelihood of success when investing in these markets.
What are the risks associated with Small and Microcaps investing?
There are many risks associated in investing in small and microcap companies, similar to investing in any other listed company. This may include:
1. Company specific changes – management, contacts, operations, customers, product cycle only to name a few.
2. Market corrections – Small and Microcap companies tend to be more volatile at times of market uncertainly. This is due to a number of reasons including liquidity, perceived company risk
3. Liquidity – many Small and microcap stocks are lowly traded and have shareholders who own a large amount of shares.
Other risks associated in investing in Small and Micro caps are outlined in the PDS. You can read the PDS for each product here:
Examples of stock stories
There are lots of innovative companies in the Australian small and microcaps sector that are doing great things both in Australia and often offshore. Below are two examples that we like. You might like them too.
Example 1: People Infrastructure
Example 2: Hub24
How to buy small and microcaps stocks?
Obviously, you can do this yourself via your online trading account or via your broker. However available broker research into this segment of the market to help inform your investment decisions is very limited and, in fact, is getting worse as evidenced in this article.
It is our belief that using professional advice and using active management is a good thing to do when looking at investing in Small and Microcap stocks. Investing in managed funds or ETFs alongside other likeminded investors is a good way to gain diversification in these segments and to manage your risk, as well as take advantage of a team of professionals who are passionate about small and microcap stocks. By way of example, the Perennial Small and Microcaps team has six experienced team members and boasts a successful track record since 2002 investing on the sector.
To put this into perspective, if you invested $10,000, you could access the professional skills of experienced small and microcap analysts for the cost of one good night out, per year. This may be something to think about.
This is not personal advice and is intended to be general advice. We do not know your personal financial circumstances and recommend you seek advice prior to investing.