Small Cap Winners
1st April 2010, Ian McDiarmid, Shares
Buying a diversified small caps portfolio makes little sense. However, individual stocks do. Ian McDiarmid zooms in on ten fledging companies set to blossom
In order to win with small caps the investor needs to be discerning. Shares has chosen five investment themes which will power growth stocks ahead in the coming years. Across the five themes we’ve picked our ten best plays. Over a year’s time horizon we expect these to generate returns of between 19-56% - longer term they could all easily double.
As the internet reaches a mass market, BATM Advanced Communications (BVC) stands to gain with its switches and routers key building blocks of a network roll-out. Likewise demand for data centre capacity will play in CSF’s (CSFG:AIM) favour. An ageing Western population will drive sales at Asterand (ATD) and Axis-Shield (AXD).
The green revolution is the big theme driving our picks Indian Energy (IEL:AIM) and Symphony Environmental (SYM:AIM). As government seeks to cut spending, outplacement specialist Penna Consulting (PNA:AIM) and Advanced Computer Software (ASW:AIM) are ideally positioned.
Our final big call is emerging markets. Economic growth will be higher in returns in general has unfortunately no evidence to support it. Buying individual small caps is worthwhile; buying the market through a widely invested open-ended investment company or tracker is a waste of money.
In theory investing in small caps should offer a superior return as they are more risky than their bigger cap brethren. The return on a share is made up of two components; the risk-free rate of return, and an equity premium. The latter will be higher for more volatile stocks, and in general the smaller a company the more risky it becomes. Furthermore, in theory, you should be able to reduce your vulnerability to an individual stock’s dangers by adopting a portfolio approach.