Three must haves

2011-06-23 00:00

There are few investment classes that inspire more pub talk than small capitalisation shares. The talk of the elusive next “10 bagger” always seems to drown out the stories of money lost on the investment the market never quite seemed to “value correctly”. But small caps are important for investors because it’s been shown that on the whole and through an extended investment cycle there have been plenty of success stories that boost investors’ portfolios. While we all wish for the next Capitec Bank Holdings [JSE:CPI], PSG Group [JSE:PSG], Grindrod [JSE:GND] or African Bank Investments [JSE:ABL], those are few and far between.

Finweek threw the question out on Twitter last week to determine which small caps were looking interesting and some of the names that cropped up included Taste Holdings [JSE:TAS], EOH Holdings [JSE:EOH] and Litha Healthcare Group [JSE:LHG].

Taste and Pan African Resources [JSE:PAN]appeared on more than one professional investor’s response. With that in mind we have compiled our list of three “must haves” for your portfolio.

Iquad Group

History has shown you can’t discount the “PSG factor”. A 46% subsidiary of Paladin Capital, the PSG investment vehicle, IQuad has been ignored by the market to date. A quick look at the Stock Exchange News Service will show its directors voting with their wallets and buying the stock. An earnings multiple of six and a dividend yield of 3,4% seem too good to resist.

Its size puts it off the radar of many professional investors but it’s a natural recipient of money flowing into the small business sector and shouldn’t be ignored.

EOH Holdings

Currently, there’s a lot of interest in information technology stocks. EOH has a fantastic track record of extracting value and returning profits to shareholders, something other IT firms haven’t always been that good at. Finweek spent some time kicking around this stock, because its directors have been consistent sellers of the share and it’s always hard to tell whether a stock has run too hard or management is just taking profits off the table.

The flip side of that is CEO Asher Bohbot is widely regarded as one of the best technology CEOs in the business and never appears to let hype overtake reality. Our eventual conclusion was you have a business trading on an earnings multiple of 10 times and sitting with R228m in cash in the bank. There’s no real gearing to the business and if an offshore player wanted access to the South African market then EOH would probably be near the top of its shopping list.

Throw in the fact EOH was able to grow its revenue by 44% over its past financial year and you begin to appreciate the dominant niche it’s crafting out.

Pallinghurst Resources

Small caps need king-makers and in the resources sector there are few as well recognised as Brian Gilbertson. His listed investment vehicle Pallinghurst has never quite lived up to the hype it promised but the math is pretty compelling. A net asset value of around 625c and a share trading at 390c means somebody is mis-pricing something. One home run and that gap will narrow.

Ashton holds shares in Pallinghurst Resources.