Small caps that beat the market

The JSE’s Alternative Exchange, also known as the AltX, has proven to be an incubator for many medium-sized companies, which subsequently migrated to the main board.

It has also given investors the choice of investing in smaller, growing companies who, in return, benefitted from the AltX’s less strict regulations and lower listing fees.

The FTSE/JSE AltX-15 index, comprising the largest and most liquid companies on the AltX, returned 17.3% to investors over the 12 months through 6 June compared with the FTSE/JSE Top40’s return of 4.54%, according to INET BFA data.

Over the past 12 months, the AltX’s top five performers – Jubilee Platinum, PSV Holdings, SilverBridge Holdings, Accéntuate Holdings and NVest Holdings – have returned between 45% and 102.7% to shareholders.

Of the 65 stocks listed on the AltX, 16 are suspended and a further three are not trading.

One of the biggest risks for investors investing in a small cap is the lack of share liquidity. That means that the stocks are not readily offered for sale or there is insufficient demand for them at any given time.

This may distort the price-finding mechanism, which is essential for a market, and especially a stock market, to operate.

On the other hand, a benefit of investing in these stocks is that the investor buys into a growing company.

Prospects for the investor include the possibility of a buyout at a premium at a later stage. Usually, but not always, a company’s management holds a significant proportion of the stocks, giving it a vested interest to succeed and turn profits.

With the market capitalisations of AltX-listed companies ranging from as small as R12m to as high as R7.1bn, investors have a large variety to choose from.

Investors need to consider a number of factors when making the decision to invest:

• Do you want to buy and hold the share for a number of years and thus overcome the lack of liquidity in a stock?
• Is the stock aligned to your view and expectations of the local economy?
  
• Do you have the stamina to weather significant share price swings, which may occur due to the low price of some of the stocks?

Remember that a 5c decline in the price of a stock worth 25c has a much harsher impact on an investment than a 5c decline in a stock worth R3.

For more on the small caps that beat the market buy and download the 23 June 2016 edition of finweek magazine here.