Some that might be immune to 'recessionitis'
by their very nature, are usually more vulnerable to marked downturns in the economy. More often than not their balance sheets are puny, cash flows are sometimes irregular and management teams usually fairly inexperienced (read: “Prone to stuff up in tougher times”).
While there’s nothing wrong with sticking to the blue chips in building a defensive position in equities (but read Vic de Klerk’s report) prejudice against small caps could see investors missing out on well-priced opportunities to make seriously big returns – albeit by assuming considerably more risk.
Naturally, small caps stocks should be used to spice up potential returns rather than anchoring a defensive investment portfolio. However, the risks associated with investing in small caps can be greatly reduced if investors apply a handful of simple “filters” to a potential investment.
Those would include:
strongest will survive… it’s the law of the jungle.
This way investors can gauge how the company fared in the last economic downturn.
That should help determine whether the company can still thrive and maintain market share in tougher trading times.
The weaker local currency, the bigger the return on export/offshore business activity.
Some companies can thrive in a weak economy by offering services or products that remain in demand whether the country is booming or in recession. Don’t leave home without those. It’s as simple as that: stay away if a company has a brittle balance sheet and irregular or unconvincing cash flows – no matter what directors expound in their commentary on prospects.
For investors with a bigger appetite for risk there are a number of lesser-known small caps Finweek reckons may be worth considering as more resistant to recessionary conditions.
Those would include electrical and rail engineering group Racec, security services group Command Holdings, Decillion (which will soon house the ultimate recession-proof business – funeral specialists Doves – as part of a reverse listing), vehicle tracking groups Digicore and Matrix, as well as waste management group Interwaste.