Smaller companies are frequently overlooked by investors. Information can be scarce and there’s often little or no financial forecasts available. Many small cap firms are totally ignored by City analysts.
Things might get worse.
‘We believe that coverage of smaller companies may reduce further with the introduction of MiFID II, increasing asset mispricing and further crystallising Downing’s niche in the micro-cap space,’ say Stockdale analyst Saumya Banerjee.
MiFID II is a set of rules coming into force next year aimed at improving financial market data transparency.
LONG-RUN PERFORMANCE
Yet performance data shows that small caps have outperformed larger company stocks over the longer-term.
*NSCI = Numis Small Cap Index
Source: Stockdale Securities
7 POINT PLAN
The lack of research around smaller companies can hand informed investors an edge.
Here is the rough 7 point checklist for small cap stock selection used by some fund managers:
• Quality of management
• Capital deployment
• Cash flow monitoring
• Sustainable margins
• Balance sheet
• Value catalyst strategy
• Discounted entry value
