Small cap recession champs shine
With the recession confirmed and the JobKeeper program set to be slimmed down there is every chance investors will now revert to value: sustainable earnings, balance sheet strength and dividends.
The stocks that don’t look sexy now are the ones to look to buy.
As an investor, what do you do? You look for companies earning export dollars and those with secure, or relatively safe income streams.
The good news coming out of reporting season is that for some companies cash flow is improving.
Hard to believe, but it’s happening.
Serviced offices provider Servcorp (SRV) impressed once again with its global diversification, enabling problems in some countries to be mitigated in others; as well as how quickly management was able to renegotiate leases, limit expenditure, reduce costs and generate cash. This is a company that paid a final dividend of 9c from earnings per share of just over 7c.
Companies are husbanding cash better than ever. Small caps are not small businesses. These are often companies that have been around for a while and are big enough to cope with stress.
What they also have is operating leverage to generate superior profit growth when times improve.
One stock that always jumps out as a small cap export hero is the ship builder Austal (ASB). The essential service of defending borders has never been so important to politicians.
Then there are the telecom services companies, who own the infrastructure which has never been more important for obvious reasons. In our small cap universe these are the MNF group (MNF) and Superloop (SLC). The latter has more risk because its revenues are much smaller and it has debt attached, but because it has built its network, revenues come in with a 99 per cent profit margin attached.
One more thing: Watch the billing software company Hansen Technologies (HSN) where shares spiked as much as 30 per cent in the wake of its full year result. They’ve come back a bit but we wouldn’t be chasing at these levels.
We’re waiting for another buying opportunity because our motto during this crisis has always been: don’t chase!
Richard Hemming is an independent analyst who edits www.undertheradarreport.com.au,
Are financial advisers worth the money?
Financial advisers are a steady hand when markets wobble. But do they deliver on the returns front? New data shows that it depends on a few key things.
To fix or not to fix, the answer is not what you think
Anyone with a mortgage or about to get one might think variable rates offer the best chance to take advantage of an expected falling cash rate. But fixing now might be a smarter option.