Microcaps Thriving while Big Stocks Struggle

Earnings season can be one of the most frustrating times of the year for many investors. Frustrating because your positions can fluctuate on performance or sentiment…or for no particular reason at all…

Earnings are important — let’s not play that down too much. But when it comes to microcaps, financials aren’t the be all and end all of a stock.

However, a particular type of investor puts great importance on company financials. For these investors, it’s the only thing they really look at. These are ‘value’ investors.

They pay little to no attention to market noise. It doesn’t matter if the ASX 200 drops by 50% tomorrow; they care only for the financials of individual companies.

They use a methodology that we call a ‘bottom up approach’.

This is when you analyse the company first, before looking at the overall industry. The last thing they consider in their analysis is the wider economy.

For example, the ASX 200 has lost 1.31% of its value over the last month. This will typically have no effect on the decisions of value investors. The RBA’s recent decision to cut rates will barely even register on their radar.

But a lacklustre earnings season…now that’s something that weighs heavily for a value investor.

The biggest stocks on the ASX are battling for earnings growth. BHP Billiton [ASX:BHP], still Australia’s second biggest company, recorded an $8.3 billion loss. And the Commonwealth Bank of Australia [ASX:CBA], Australia’s biggest company, recorded net profit growth of just 2% over the previous year.

Things aren’t expected to get any better anytime soon for the ‘big boys’ on the ASX.

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The Australian Financial Review asked six top fund managers about their thoughts on Australian equities. Their concerns focused on two things: slow economic growth and sluggish revenue generation.

Anton Tagliaferro, fund manager at Investors Mutual, told the AFR:

It remains very difficult for many companies to grow their revenue line given the sluggishness of most economies around the world as well as the intensity of competition in many sectors such as retail, telecommunications and banking.

Olivia Engel, fund manager for State Street Global Advisors, said:

There’s not much real growth around. We see a slight fall in dividends but not because investment is picking up, it’s just to bring payout ratios back to earth amid subdued earnings.

So why are we talking about large-cap stocks, when my headline was about microcaps?

Well, sometimes it pays to remember why microcaps are so much more exciting and full of potential than the ‘safe’ companies most people refer to as ‘blue chips’.

We don’t mean to slam large-cap stocks. After all, most of Australia owns them through one superfund or another. But it’s times like this, during the Aussie earnings season, when we’re thrilled to be advising you on tiny, fast-moving stocks in our premium services, Australian Small-Cap Investigator and Microcap Trader.

The largest stocks on the ASX are petrified about growth. Yet microcap stocks often care little about the sluggishness of the overall market or blue chips stocks. Share price movements for microcaps are more likely to be correlated to company action rather than the woes of the market.

While the broader market slowly grinds along, some of our Microcap Trader tips are thriving. Not every microcap will pay off, but the sheer size of the explosive growth when some do can more than make up for those that don’t.

Meanwhile, the stocks we look at in Australian Small-Cap Investigator may not be quite so small or volatile, but the story is similar. I recently recommended that my readers sell a small-cap stock that had brought us better than 1,000% gains.

When moves like that are on offer, it’s hard to get too worked up about a few percentage points gained or lost in the big end of town.


Sam Volkering,
Editor, Money Morning

Editor’s note: Sam Volkering and Kris Sayce’s Microcap Trader looks at the tiniest of the tiny stocks on the ASX. In order to avoid excessive volatility in such tiny stocks, Microcap Trader is limited to 500 subscribers, and is currently closed to new members. Sam’s Australian Small-Cap Investigator also looks at the small end of town, but not quite as small, volatile or risky as Microcap Trader. You can learn more about Australian Small-Cap Investigator here.

PS: The above article is an edited extract from Microcap Trader.

Sam Volkering
Sam is Editor for Money Morning and it's small-cap and technology analyst. He spends his time hunting down the most exciting stocks on the planets, whether they’re potential-packed volatile small-caps or tech firms transforming our future through cutting-edge technologies. You can find more of Sam’s work over at Australian Small-Cap Investigator, where he shares the best small-cap stocks he finds on the ASX, or at Revolutionary Tech Investor where he reveals the latest breakthrough tech investment he’s discovered.

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