THE VALUE TRAP

Finweek English Edition - - COMPANIES & INVESTMENTS - Marc Ash­ton marca@fin­week.co.za

Of­ten in­vestors con­sider

look­ing at small-cap or “penny stocks” with the idea that it is eas­ier for a share to move from 5c to 10c, than it is for a R100 share to move to R200.

As Paul Theron from Ves­tact al­ways re­minds in­vestors, of­ten a share trades on a su­pe­rior earn­ings mul­ti­ple be­cause it de­serves to.

What you don’t want i s to be buy­ing into small-cap shares where they tie up your cap­i­tal but fail to ac­tu­ally de­liver an i nvest­ment re­turn.

A SHORT CHECK-LIST FOR IN­VESTORS TO CON­SIDER:

Be wary of sim­ply look­ing at net as­set value (NAV) when it comes to small- caps. Rather look at the tan­gi­ble net as­set value, which will give you a clearer idea of the un­der­ly­ing as­sets.

Look for com­pa­nies where man­age­ment are l arge share­hold­ers and reg­u­lar buy­ers of shares in the busi­ness.

Look for strong cash flows – healthy small busi­nesses are those that are grow­ing.

Do the maths. It is easy to say a share can move from 5c to 10c, but it is very easy to take the num­ber of shares in is­sue and mul­ti­ply by what you think the share is worth. It will give you a very clear idea of how big the busi­ness has to grow to gen­er­ate your in­vest­ment re­turn.

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