Searching for Microcap & Nanocap Gems on the ASX

Mark Tobin

In this article I set out 5 ways to selectively filter down the 1,800 companies outside the top 300 into a cohort that's at least worthy of some further research. Given my previous article (VIEW LINK) highlighting that there are over 1800 companies outside the top 300 companies listed on the ASX how on earth does one go about narrowing down the field? At least into a cohort that are worth further analysis, let alone committing any capital to. Much like a Coober Pedy opal miner we need some tools to help us unearth some gems.

First and foremost you have got to formalise what is your investment philosophy and investment strategy. I have learned that there are many different ways to make money in the stockmarket, but you have to find what works for you. This strategy then needs to be systematic and repeatable. As an investor it is then necessary to maintain stout conviction in your chosen strategy and avoid changing tack with every turn in the market. Are you a growth investor or a value investor? Are you a fundamental/bottom up investor or a top down macro/thematic investor? Or even a pure technical/chartist investor. Perhaps you mix and match a few of the preceding philosophies into some unique system that works for you, a secret sauce if you will. The key point however is you have to lay down some ground rules that can be applied quickly and easily to rule out stocks from further analysis based on your investment strategy.

Secondly sreens and filters are a good tool for narrowing down your research universe. Screen and filters can be for a host metrics such as market capitalisation, dividend yields, price to book, and price earnings ratios etc. I would however sound a note caution here, over time I have found the metrics calculated for microcaps and nanocaps from running screens can be erroneous. Screens are only as good as the data being screened the old “garage in, garbage out” adage. I find the output from screens on microcaps to not be as robust as when you screen the top 50 stocks for example. This can lead to omissions of stocks worthy of further analysis or making others appear uninviting.

Thirdly, looking through ASX announcements on a daily basis is also a good way to find stocks for further examination. The quarterly “Appendix 4C” announcements I find particularly good announcements to look at. This gives a good snapshot in terms of the cash being generated or not by the business; cash generation is crucial for microcaps and nanocaps. Companies occasionally attach a quarterly company update with the Appendix 4C which gives you a good chance to check in on their progression. Company presentations made to investor or industry conferences, at AGM’s or linked to a capital raisings are also fruitful in learning about the company and the industry it operates in and for assessing whether more in depth research is warranted.

Filtering through the new 52 week, highs and lows can throw up some great new ideas for further scrutiny. A stock hitting new 52 week highs for example maybe on the cusp of an extended share price run. Some people wrongly assume that stocks’ hitting 52 week highs implies that the “easy money” has been made. In this space that might not necessarily be true. It can herald the business becoming better known and on the radar of institutional investors as it has finally achieved a certain level of maturity and scale. Hitting 52 week high’s also doesn’t necessarily mean its expensive it can still be reasonable value, even potentially cheap given the potential growth outlook. Similarly stocks hitting 52 week lows can be good entry points if they are in the nascent stages of a turnaround in the business perhaps through a new management team, new board, new strategy etc. Stocks hitting new 52 week lows can be useful for making additions to watchlists for on going or occasional monitoring to ascertain when current woes or headwinds are starting to dissipate.

Finally riding on the coat tails of other investors is another excellent tactic to find new ideas. With over 1800 names its is virtually impossible to be across every stock or even a 10% subset realistically, even for professional fund managers. By simply subscribing to professional microcap and smallcap investor newsletters (generally free), reviewing investor presentations or marketing material on their websites, following them on social media you can gain a lot from their work, expertise and insights. One of my favourite places to look in this regard is the annual reports of all the listed investment companies (LIC) focused on microcaps and small caps. LIC’s are required to disclose their full portfolio as at their financial year end. The full portfolio is generally buried deep in the back somewhere of the annual report. Not withstanding having the full portfolio at a point in time it doesn’t tell you if the LIC was buying, holding or selling at year end or indeed what the LIC is doing today with that holding. It does however throw up list of company names that professional analysts and portfolio managers have looked at and decided to commit capital into. This implies a certain level of quality and business maturity and possibly names worthy of further research.

This is by no means meant to be an exhaustive list of where and how to find some little jewels in the microcap and nanocap space. I hope it does though provide some relatively easy pointers to follow and apply in your search process. With any luck you’ll turn up a few gems or at least something interesting.


Mark Tobin

I focus on ASX listed microcap and nanocap​ stocks which is​ anything from $10mil to $300mil market cap and everything​ in between. This truly​ is the under-researched​ part of the ASX. My hope is to bring you interesting microcap stocks and news.

Expertise

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