Some that might be im­mune to 're­ces­sioni­tis'

Finweek English Edition - - Cover - SMaller COM­Pa­nIeS, • Does the com­pany of­fer strong brands or ser­vices? • Does the com­pany have a track record of op­er­a­tional per- for­mance? • How big are the trad­ing mar­gins? • Does the com­pany earn hard cur­ren­cies? • Is the well-be­ing of the com­pany

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.

The

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.

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