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Smart money small-caps: Azure Healthcare Ltd and Money3 Corporation Limited

Regular readers will know that I have an interest in companies with market capitalisations below $500 million. I focus on small-cap companies because I’m a young man, I can afford some risk, and the amount of capital I control is low: these are natural advantages. However, there’s room for at least one small-cap in even an octogenarian’s portfolio, in my opinion.

It was less than two months ago that I wrote about Azure Healthcare Ltd (ASX: AZV). A small company that sells hardware and software designed to monitor patients in hospitals and other institutions (including jails!). Since that article, shares are up about 20%. The thesis was pretty basic: operating leverage would send profits rocketing up, and increasing pressures on hospitals would have them keen on a more efficient administration system. This is particularly true in the USA, where the profit motive encourages hospitals to cut costs. The company hasn’t reported since then, but they have announced a potential takeover.

It’s worth mentioning that Azure Healthcare recently didn’t announce that it will lose a key person, Nathan Buzza, who was responsible (in large part) for the most important part of the business. The reason that the software business (overseen by Buzza) is so important is that the margins are far better than the hardware business. Indeed, it was only once Buzza (and Robert Grey) rejoined the company that its fortunes turned around.

I found out a little while ago that Buzza would leave the company. Indeed, I’ve been tardy bringing this information to you: the knowledge is already in the public domain. More important is the fact that I emailed the CEO Robert Grey to suggest that the company announce the news (as I believe it is market sensitive) and he didn’t reply (perhaps he did not notice it, or I sent it to the wrong address). As a share analyst it’s always tempting to remain in the good graces of management, because your access to them depends on it. However, this creates problems when you need to report something negative. If you ever find a CEO who is fast to engage with criticism, note their name: they truly are a rare kind of leader.

More to the point, Azure Healthcare has recently announced that it received a non-binding takeover proposal from a party they did not name at a price they did not specify. Interestingly, the share price rallied prior to the release of this information, subsequently reaching a high of 41.5c the day of the announcement. I believe any takeover offer below 38c would not be a serious bid, not least because the superstar team at Pie Funds have come to the conclusion that shares in the company are “worth 36c and possibly 40c in a takeover.” Personally, I think shareholders will be shortchanged if the company sells for anything less than 40c per share, but I would not buy at 36c or above.

Speaking of my favourite institutional investors, another pick of theirs that has my attention is Money3 Corporation Limited (ASX: MNY). Pie Funds own over 5% of the company, which is still guided by its founders and specialises in lending money to people who can’t get a loan from a bank. Personally, I don’t feel great about the ethics of such businesses (some people simply shouldn’t be borrowing), but I’m willing to withhold judgement – for all I know, the helping hand could really change someone’s life for the better. I do mention the ethics because questionable lending practices have lead to stronger regulation of some lenders. In particular, Cash Converters International Ltd (ASX: CCV) was hit hard by regulators last year, though the share price has recovered somewhat since then.

I think it’s worth keeping tabs on what successful market participants are thinking, and it’s certainly a positive that the top momentum traders at Asenna Wealth Solutions have taken a position in Money3. As a value-based investor, I’m not buying shares, but if Money3 does manage to sustain its growth, the share price will appreciate over time. The fact that the company has bolstered its online presence is a positive, and I’d hazard a guess that the guys at Pie Funds see some positives for the sector, since they also have an investment in Careers Multilist Ltd (ASX: CGR), which has a cashflow financing business that advances cash to companies with sufficient inventory.

Foolish takeaway

I tend to avoid impulsively following other investors – that is unlikely to lead to great results over the long term. However, I can’t deny that some of my best investments have been influenced by other market participants. Generally, if I’ve formed an opinion about a company, and an investor I admire agrees, that can bolster my confidence. Historically, this has worked out to my benefit. Don’t mindlessly follow anyone – but take note of those you respect. When you independently agree with an investment, the actions and research of others are a very valuable second opinion.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Azure Healthcare.

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