Contango MicroCap Limited (ASX: CTN) has achieved returns of 17.6%pa since listing 10 years ago, far outpacing the All Ordinaries Accumulation Index and most other fund managers over this period. As the name implies the investment focus is on small companies with a capitalisation of $10m to $350m when purchased. This is a very under-researched sector of the market and can offer considerable upside potential for the astute investor.
Portfolio risk is mitigated by holding an average 30-50 stock at any one time, all at different stages of development. By way of example Contango was an early investor in Capitol Health, G8 Education and Slater & Gordon – just to mention a few of the better known ones.
Contango MicroCap has a policy of paying a 6% annual dividend (usually franked) on the net asset value of the portfolio – providing a reasonably predictable income stream to investors.
Contango Microcap ($1.02) currently sells at a 11% discount to the net asset value of the underlying portfolio, pushing the yield close to 7% and also giving investors a free ride into the management company (Contango manages a number of unlisted wholesale funds). With management already in house there are no fees payable and Contango Microcap is a very attractive entry into a high growth sector of the market.
FlexiGroup Limited (ASX: FXL) is a diversified financier servicing the consumer and business markets. Partners include Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH), Dick Smith, Officeworks, Bing Lee, Flight Centre and Apple. With a range of innovative financial services and products FlexiGroup has the capacity to grow both organically and through strategic acquisitions. However, despite a reasonably positive outlook, the share price has fallen 24% over the past year as investors take a dim outlook on the prospects for a sustained improvement in both business and consumer confidence. In my view the market is overreacting and the share price fall is unjustified.
At a projected 2015 price earnings ratio of 10.88 and a fully franked yield of 5.5%; FlexiGroup ($3.38) offers good value on a medium-term view.
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Motley Fool contributor Peter Andersen owns shares in Contango MicroCap and FlexiGroup