Following on from this article which outlined the five key attributes which fund manager Karl Siegling from Cadence Capital (ASX: CDM) uses to identify outstanding small and mid-cap stocks to invest in; here is his reasoning as to why these five attributes are important, as well as five more stocks which meet this criteria.
- Look for strong earnings growth, solid free cash flow and an attractive valuation to compensate for the risk of investing in smaller, more volatile companies.
- A strong balance sheet with cash will provide the capital for growth and minimise the risk of a dilutive capital raising.
- Management with a record of success and 'skin in the game' will have their interests strongly aligned with shareholders.
- Reasonable liquidity is an important factor when investing in very small companies as otherwise it can be difficult to enter and exit a stock in a timely manner.
- Because Siegling uses a mixture of both fundamental and technical analysis in his investment approach he also looks for a share price chart that is trending upwards. His motto is "Buy assets that are going up, sell assets that are going down."
With the reasoning of those five attributes in mind, here are five stocks that meet his criteria:
1) Sunland (ASX: SDG) is run by its founders, has a strong balance sheet and has a share price being helped along by a property sector tailwind.
2) Abacus Property Group (ASX: ABP) is also enjoying the benefits of a property sector tailwind.
3) The recently listed Freelancer (ASX: FLN) has strong earnings growth potential and is run by its founder.
4) Software firm Reckon (ASX: RKN) produces strong cash flows.
5) Ingenia (ASX: INA) has a management team with a strong track record and a positive growth outlook.
Foolish takeaway
With the New Year approaching fast, now is a good time to review your portfolio and consider making adjustments where necessary. While patience can be a virtue when it comes to investing, it is also important to consider removing stocks which no longer meet your investment parameters and replace them with higher conviction choices.
