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3 small caps that most investors don’t even know exist

Serious value investors will no doubt be familiar with the name Seth Klarman. For those who are not, Klarman is a renowned investor who runs the Baupost Group in Boston. Baupost is a private investment partnership that manages around $25 billion and has achieved outstanding returns since its formation in 1982. Klarman’s annual letter to investors is a prized read, as is his book Margin of Safety. His writing has led to a body of great quotes to draw upon, one of my favourites is:

“One way of dealing with information being more available is to stop playing the game and seek out securities or asset classes where there’s less information or competition.”

The great thing about Klarman’s advice here is that it favours the individual investor. For reasons including size, liquidity and broker coverage many investors (particularly the institutions) just don’t spend their time looking for opportunities amongst the small, unloved and under-researched stocks.

For investors who are prepared to ‘put in the leg work’ there are a few small companies that aren’t widely covered by the big brokering houses but which could be worth further investigation.

Ingenia Stapled (ASX: INA) is a leading owner, operator and developer of housing communities for senior aged residents. Ingenia focusses on providing affordable housing and is proving to be skilled at development initiatives and acquisitions which add value. With the tailwind of an aging population, the outlook and opportunities to grow for this $340 million company are positive.

With a market capitalisation of just $80 million Calliden Group Ltd. (ASX: CIX) continues to be overlooked by many investors. As the recent sale by Wesfarmers Ltd (ASX: WES) of its broking business for over $1 billion reinforces, there is certainly value being ascribed to insurance broking assets. With a growing insurance agency operation, Calliden might be small today but it might not be small for long.

When it comes to food producers, the market’s attention has been focussed on all the action within the dairy sector after Bega Cheese Ltd’s (ASX: BGA) failed attempt to acquire its peer Warrnambool Cheese. Looking further afield however Capilano Honey Limited (ASX: CZZ) has the capacity to process and pack over 45,000 tonnes of honey per year. It is one of the world’s largest honey packers, yet it is not on the radar of many investors.

Foolish takeaway

One reason some investors shy away from small cap stocks is due to their higher volatility. Volatility doesn’t scare investors like Klarman, rather he uses it to his advantage. Keeping a watching brief over a selection of smaller stocks means you can be ready to strike when the price is right.

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Motley Fool contributor Tim McArthur owns shares in Calliden Group Ltd.

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