I often hear investors talking about small to medium companies, each with a theory on which sector or idea will be the next big thing. As many readers will be aware I love small companies because of their growth potential. Where I differ to most investors is that the companies I invest in should not only be growing but also must be turning a profit. If the company is also able to pay a dividend I become particularly interested.
Before I discuss the four companies I like, there is one key trait as an investor that you must possess before you should even consider investing in smaller companies. That being the command of patience.
The reason patience is the key is because profitable small companies trading on low multiples are only doing so because the rest of the market has not yet discovered them. Many successful small companies are often too small for fund managers to even investigate under the rules of how they can invest their clients’ money. As such you may need to wait a considerable amount of time before the market catches on to what you already knew.
Another key point stopping larger investors from owning these companies is the liquidity of shares. By this I mean on any given trading day, not many shares will be offered up for sale.
What this means for you and me is that we have an opportunity that larger investors do not have, but it also means we need to be patient, place limit orders and wait for our orders to be filled. I cannot stress enough that using a market order for a small company can result in paying a lot more than is necessary. The same can be said for when you sell small companies, place your sell order at your desired price and wait for the market to come to you.
Ok I know what you’re thinking, enough of the warnings just get on to the companies.
Villa World Ltd (ASX: VLW)
Villa World Limited is a residential property developer. In the 2016 FY (financial year) revenue increased by 20% while NPAT (net profit after tax) was up by over 30%. Dividend investors will be excited when they hear earnings per share (EPS) grew by 19% and the company is currently yielding 8% fully franked. While Villa World is only forecasting a rise of 5% or more in NPAT for 2017 this company has a habit of under-promising and over-delivering.
CSG Limited (ASX: CSV)
CSG Limited is a print and business technology solutions provider along with operating an equipment financing division. After posting a 10% increase in revenue and 20% increase in underlying NPAT for 2016 FY the share price fell over 25%. This was despite forecasting a 15%-26% increase in EBITA for 2017 FY along with maintaining a 9 cent dividend. In my opinion CSG Limited currently presents a unique opportunity for an investor who can ignore short term price movements
CML Group Ltd (ASX: CGR)
The key for CML Group is its finance division whose primary function is invoice financing. If you’re unware invoice financing is where CML provides upfront payment of company invoices (at a discount) so a business does not need to wait the usual 60-90 day terms for its invoice payments. Many small businesses suffer from cash flow problems so this service helps them to better plan their finances. It also means the risk of not being paid by their customer is transferred to a financer, in this case CML. I believe the 2016 FY was the turning point for CML Group with EBITA up 263% on the previous year and forecast to more than double in 2017.
OTOC FPO (ASX: OTC)
OTOC consists of two divisions. Surveying, planning and design along with an Infrastructure division which provides construction and maintenance services to clients in renewable energy, government, resources and utilities. Like CML Group, OTOC’s 2016 FY report was particularly strong with earnings per share rising by over 300% to 7.4 cents per share. Sitting on a current share price of 32 cents, OTOC trades on a more than reasonable PE (price earnings) of just over 4. Throw in the announcement of a maiden dividend of 0.5c and I believe it is worthy of investigation by any investor looking at the small cap space.
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Returns As of 6th October 2020
Motley Fool contributor Alan Edmunds owns shares of CareersMultilist Limited, CSG Limited, and OTOC Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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