THE VALUE TRAP
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.