Top small-cap picks for 2020

It was another pitiful year for the JSE’s small-cap sector, with risk-averse investors shunning attractive earnings multiples and, in some instances, generous dividend yields.

The small-cap index shed 8%, but it might have been worse were it not for a flurry of corporate action (notably buyouts and takeovers) that buoyed certain share prices.

There were few sparkling gains by genuine small-cap stocks. Not even the smaller platinum shares — Jubilee, Tharisa, Bauba and Wesizwe — followed in the footsteps of the sterling run from their bigger countermates.

The few standout performers were broadcast group eMedia (N shares up 44%), Argent Industrial (20%), technology specialist PBT (56%) and human resources group Primeserv (36%).

Some former market darlings fell on hard times. Logistics group Santova dropped 47%, internet security group ISA Holdings was down 40% and services group CSG Holdings plunged about three-quarters.

SmallTalkDaily analyst Anthony Clark says a series of corporate scandals saw many large caps become mid-caps, and many mid-caps become small caps. This includes Ascendis, Brait, EOH, Tongaat Hulett and Blue Label Telecoms.

But Clark says there were signs of an uptick in the small-cap sector near the end of the year.

"Investors perhaps came to realise the bargain-basement valuations in the sector after an extended sell-off. This led to the ‘valuation gap’ being seized by private equity and activist funds to snap up sector counters," he says.

Pioneer Foods, Clover Industries, Rolfes and Metrofile all got buyout offers at juicy premiums.

There was a slew of delistings, and planned delistings, among small caps in 2019 — including Howden, Interwaste, Verimark, Torre Industries, Avior, Trans Hex, Dawn, Niveus and Efficient.

Clark believes this trend will continue in the year ahead.

The FM’s small-cap portfolio aptly sums up this malaise with a negative return of 17.5% (with dividends added back). Only one stock — agribusiness investment firm Zeder — fashioned a positive return, thanks to the proposed takeover of its main investment, Pioneer Foods, by international consumer brands conglomerate PepsiCo.

Fintech business Capital Appreciation came out square if dividends are included, and private equity investor EPE Capital Partners lost only a smidgen of value over the year.

Our big bruises came from Cognition Holdings, Wescoal, Stadio and York.

Cognition and Wescoal paid a heavy price for disappointing investors, but private education specialist Stadio and forestry group York didn’t really put a foot wrong. Still, the market had little patience for their respective "stories" to develop.

Our small-cap picks are:

Hosken Passenger Logistics & Rail: A superbly managed business offering an essential service to Cape Town commuters. Strong dividend flows should continue.

Capital Appreciation: Another delay in profit flows this year, but the FM believes the business is well positioned to capitalise on fast-changing point-of-sale trends.

Nampak: This packaging giant is now a small cap, but the share price drop has been overdone.

Kaap Agri: This agri-services business serves some viable niches, especially in the rural retail and fuel sales markets. It could rerate in 2020.

Argent: Determined value-unlocking efforts will continue, and the ongoing share buybacks should underpin the share price.

Trellidor: A well-run security products manufacturer with a management team meticulous about capital allocation. Will remain resilient.

Stor-Age: This property company serves a vibrant niche in SA and the UK. The executives, refreshingly, are strongly aligned with shareholders.

Grindrod: Something has to give at this logistics business. Surely a break-up is on the cards, which could unlock substantial value.

PBT Group: This technology group had a strong 2019. The FM believes this trend will continue.

Novus: The printing market is tough, but this lean and mean group is making steady inroads into the packaging and labelling sector.