Always a chance in the small caps

It is said that there are only two occasions when small-cap stocks are correctly priced: when they initially float and when they are ultimately taken over. For most of the rest of their time quoted on the stock market, they usually lag well below their real worth. But that just means long-term small-cap investors like me get ample opportunity to build up holdings in established and profitable PLCs at attractive levels.

In fact, I am taking this opportunity now, as I have some money to reinvest.

I have just received the proceeds from Grainger’s takeover of the equity-release specialist Sovereign Reversions.
I was somewhat disappointed with the bid price, at which I only broke even. However, the cash boost to the portfolio I hold outside individual savings accounts (Isas) does give me a great chance to buy into other companies at what I believe are significant discounts to real worth.

So far, I have added to four of my Alternative Investment Market (Aim) holdings: Christie Group, Concurrent Technologies, Pressure Technologies, and THB. Unlike many, I do not bother speculating on the chances of a double-dip recession, the future of the eurozone, the oil price or China’s growth rate – I leave this to economists and taxi drivers. I focus on “value” investing – trying to buy £1 for 50p and, in this case, boosting my dividend income given Sovereign’s minuscule yield.

Christie – “a leading professional business services group with 31 offices across the UK, Europe and Canada, catering to its specialist market in the leisure, retail and care sectors” – has had an extraordinary yo-yoing share price. Its shares floated at 145p in 1988, but I bought in between 33p and 35p in 2002. As profits grew, the share price hit 260p in 2006 and 2007, in spite of Christie haemorrhaging cash on a software venture. Then came the subprime maelstrom – and a near paralysis of Christie’s business transactions – which saw its shares touch 19p in 2009.

But, following cost reductions, Christie has returned to profitability, and got out of debt – although it currently pays no dividend. I have been buying more at 42p – a price that gives the group a market capitalisation of only £10.5m. I believe that Christie’s market-leading stock-taking businesses – which deliver a more regular income flow – are worth that capitalisation on their own.

Concurrent Technologies – “a world-leading specialist in the design and manufacture of high-end embedded computer products” which gets 50 per cent of its turnover from North America – has seen its shares fall on the deferment of a major contract. I had paid up to 45p – so I have been happy to add more at 29p.

Pressure Technologies – a maker of high-pressure seamless steel gas cylinders for energy and defence markets – was hit by a profits fall, which dragged its shares down from 245p, although its dividend was upped. I added more at 150p. Both Concurrent and Pressure are cash rich and have a dividend yield of 4.5 per cent.

Finally, THB – an established insurance broker which is profitable, expanding into Asia and yielding 4.5 per cent – looks undervalued on a market capitalisation of £19m, when revenues approach £50m. Insurance brokers are usually valued at £1 per £1 of revenue,
so I have happily added shares at 58p.

John Lee is an active private investor, writing about his own investments. He may have an interest in any of the companies, securities and trading strategies mentioned.