Microcap managers navigate a lonely universe

Source: The Australian Financial Review?
Published April 10, 2019

A decline in analyst coverage of small companies is creating an opportunity for expert stockpickers to buy listed businesses at good prices, but it also means the market is taking longer to appreciate their value.

Andrew Smith of Perennial Value told the Coffee Microcaps Conference that the top 100 listed companies on the exchange had an average of 12 analysts covering each stock, while companies in the “small ords” index had an average of six analysts with coverage. Beyond that, in the microcap space, the average dropped to 0.4 analysts per stock.
That, he said, created an opportunity for investors prepared to spend the time and resources researching small companies.

Not being rewarded

“That’s how you make money,” he said, by doing more work than the broader market is doing.
But other managers said the decline in analyst coverage was working against them, and companies that are delivering good earnings are not being rewarded by the stock market.
This included mining services businesses, which he anticipates will benefit as resource companies are forced to spend on maintenance they had previously delayed. He also cited construction, linked to the pipeline of infrastructure spending compensating for the slowdown in residential projects; and the retail sector, as certain operators benefit from changing industry structures.

Fully priced

On the sidelines, fund managers said it was just as hard to find undervalued companies in the microcap space, as good opportunities had become fully priced.
As investors in microcaps tend to be on the hunt for high-growth companies, members of the audience posed questions to fund managers around how to spot so-called “red flags”.
Wilson Asset Management’s Mr Oberg said management selling tended to raise concerns, but at the same time provided an opportunity to buy into a desired stock.

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