If the JSE was a painful place in 2018, then punters who doggedly pursued opportunities in the small-and mid-cap sector will probably show the deepest scars.
Officially the small-cap index fell about 18% in 2018, with the mid-cap index crimping 11%. The JSE industrial board, home to a slew of small-and mid-cap stocks, was off a hefty 20%, while the AltX (which includes many entrepreneurial counters) was off 12%.
A good number of former small-and mid-cap darlings came a horrible cropper during the year. These include Ascendis Health (down about 78%), Blue Label Telecoms (down over 60%), private education group Curro (down 40%), Metrofile (35% lower), Zeder Investments (down 35%) and industrial giant Invicta (down 32%).
The market was not in a forgiving mood when it came to perusing negative news or strategic setbacks. Predictably, there was persistent chatter as some large fund managers abandoned small-cap mandates and set market capitalisation floors for their portfolios.
Which doesn’t mean the fear was unjustified: some businesses are backed up right against the wall. Construction companies Aveng, WG Wearne, Esor and Group Five are trading at a smidgen of their pre-Soccer World Cup peaks. Franchiser Taste Holdings, which owns global food brands Starbucks and Domino’s, is again scratching for fresh funds, while sprawling building supplies business Distribution & Warehousing Network is likely to be bought out in a precariously pitched 1c a share offer.
Against this background, the FM’s small-cap portfolio performed commendably, with a return of about 10% (if dividends are included).
Our portfolio benefited from a late-year acceleration from logistics specialist Value Group and the market warming (finally) to an ongoing sale of assets in investment company Stellar Capital Partners. The buyout of engineering industrial supplies group Howden Africa and smaller gains by Wescoal and Capital Appreciation also boosted returns.
The long-shot selection of Zimbabwean investment company Brainworks (down almost 40%) probably won’t rank as our smartest moment.
With the small-cap sector on the JSE looking incredibly cheap, the FM was spoilt for choice for this year’s portfolio selection.
There are plenty of recovery opportunities. But we have learnt (the hard way) that turnaround opportunities can be prolonged. So the bias is on value or, more succinctly, opportunities where significant downside seems extremely limited.
The bias is on value or, more succinctly, opportunities where significant downside seems extremely limited
— What it means
Our 10 small-cap picks are:
Cognition Holdings: Controlling shareholder Caxton is clearly signalling its intentions to build an imposing digital services platform at this specialist technology company. The share price is supported by a sizeable cash holding, which could be mobilised for more deal-making.
Workforce Holdings: This perennially profitable services counter — which trades at a multiple of less than four times — is gearing up for action (having announced a R1bn domestic medium note programme recently). Expect big things.
EPE Capital Partners: The prime movers behind this investment company have a fine track record, and hold an intriguing bunch of investments. Perhaps the discount to an NAV of more than R11 a share is a little disrespectful?
York Timbers: Hopefully the market will finally see the wood for the trees in this undervalued forestry business, which has a tangible value far in excess of the share price.
Zeder Investments: The FM is banking on a recovery in this agri-business group’s investments in Pioneer Foods and Kaap Agri. At the same time, its 97%-owned subsidiary, Capespan, will soon be awash with cash after selling off its Chinese investment at a huge profit.
ENX Group: While this industrial counter is unlikely to shoot the lights out in terms of earnings, the moves afoot to unlock value by evaluating potential offers for certain business segments could spur the share price in 2019.
Stadio: This year’s report cards should mark more clearly the longer-term potential of this tertiary education specialist, which is headed by irrepressible Curro founder Chris van der Merwe. The development of the "multiversity" campus in Durbanville, Cape Town, could be a game-changer.
RECM & Calibre: A potential listing of its cash-spinning alternative gaming assets (Goldrush) and the ongoing tilt at international investment counter Astoria might mean an interesting year for this "deep value" investment specialist.
Wescoal: The FM still thinks this junior coal miner has plenty of growth potential — coupled to a distinct possibility of participating in consolidation in the sector (anyone at HCI Coal listening?).
Capital Appreciation: The share price of this fintech specialist has drifted off its high of 105c — possibly because punters expected more in the interim numbers. The full-year results to end-March, hopefully replete with a confident dividend declaration, will reignite sentiment.
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