At the beginning of last year, the Financial Mail could gloat over an enviable 40% gain in the small cap portfolio we had picked for 2015. Unfortunately, this year we’ve had to swallow humble pie after parts of our enlarged 2016 portfolio were clubbed mercilessly.
It was the twilight zone for Distribution & Warehousing Network (Dawn) — down more than 50%. If only we had been sensible enough to back the unflappable Afrimat instead.
Value-laden and perennially profitable counters like African Media Entertainment, Trematon Capital and Bowler Metcalf provided unexpected drag.
Fortunately, small telecoms group Huge came through strongly, along with Amalgamated Electronics Corp (bought out by Stellar Capital Partners).
Overall, the total return (including dividends) was 6% — better than the all share index but well below our expectations.
For 2017, we will hope for steady rather than spectacular performance, so please forgive the uncharacteristically cautious tone in this year’s dozen small-cap selections.
We have limited ourselves to operating companies, and for the sake of clarity have avoided selecting investment counters and property stocks. In truth we would have considered only Tiso Blackstar (seriously undervalued) and RECM & Calibre (intriguing portfolio positions) among the investment counters, and might have been tempted by high yielders like Tower, Texton and Fairvest among the real estate counters.
Such temptations aside, here are the Financial Mail’s 2017 small-cap picks:
Rolfes (520c): Shares in this chemical specialist have surged in recent months. But earnings growth prospects look solid with more upside this year.
Quantum (295c): With the drought broken in most of SA, this chicken, egg and animal feed business should start fattening up margins again. It’s operated sans the usual corporate frills, and the good times should bring rich cash flows. The share is dirt cheap.
Howden Africa (R30.60): Something has to give at this industrial services business. Either a chunk of the cash pile will be paid out as a special dividend, or the US parent company will pitch a buyout offer to minorities. Either way, the downside is limited.
eMedia N-shares (600c): These low-voting shares trade at a huge discount to the ordinary shares. eMedia has some quality assets — especially e.tv and 24-hour news channel eNCA — that are capable of strong cash-flow generation. The company should start bedding down the OpenView HD satellite platform in the next 18 months.
Metrofile (500c): A dependable and easy-to-understand business that has locked into a cosy corporate storage niche. We have no hesitation in selecting it again.
Vunani (195c): An overlooked financial services counter, which is strange considering how dogged founder Ethan Dube has been in turning it around. Vunani looks comfortable in its niches, and we expect decent earnings, and a generous dividend.
Jubilee Platinum (72c): This is our "hallelujah" pick for 2017. It’s been a long (and fairly complicated) story at Jubilee — but there are finally signs of traction, and with a bit of luck it could run strongly this year.
CSG Holdings (139c): We like the tilt at security services, and think 2017 might be the year when some compelling critical mass is built in this (sadly) vibrant niche. The share price is undemanding, to say the least.
Nu-World Holdings (R30): This consumer appliance distributor looks a sitter — modest earnings multiple and generous dividends thanks to steady cash flows. Nu-World is perhaps too conservatively run for some investors, but the emergence of a new strategic investor (in the form of Wild Rose Capital) might provide an extra charge.
Crookes Brothers (R61): This agribusiness has done well to diversify away from sugar in recent years, with deciduous fruit, bananas and macadamia nuts coming to the fore. Sooner or later the market is also going to figure out the potential of properties that Crookes Brothers intends developing.
Holdsport (R59.70): Retailers might not be too popular now, but Holdsport is able to cash in on this nation’s sports-mad psyche. We keep thinking that one of the bigger retailers might want to tackle Holdsport with a premium-priced buyout. Meanwhile, there are sumptuous dividends in the offing.
Purple Group (50c): Our sentimental choice for 2017. Purple’s EasyEquities platform — which allows fractional share ownership at no great cost — is a great innovation. Of course, critical mass is essential for viability. If there is any justice in this world, Purple will woo millions of cost-conscious retail clients to EasyEquities.
- The writer holds shares in Vunani and Jubilee Platinum
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.