11 April 2013

Should We Avoid Investing in Small Cap Counter?

We have seen a Penny Stock Rally in recent months, indicating that the market is shifting the focus to penny stocks. In case you do not know the meaning of "Penny Stock", it means that the counter is having price lesser than S$1.00, with lesser shareholding value and of course lack of liquidity. It could take longer time to buy and sell the counter compared to large cap counter. So the market could imply some liquidity risk premium to those penny stocks.

To me, I prefer to invest in medium cap counters, which size is in between small cap and large cap. I would consider the small cap is lesser than S$100M, and large cap is more than S$1.0B, where medium cap stands in between S$100M and S$1.0B. Anyway, this is my own definition of small, medium and large cap counters. 

Back to the question, should we avoid investing in small cap counter? You should access your own risk/return profile as well. The smaller capital size company could have issue in competing with its larger peer, especially for those in industry that requires a large capital expenditure to acquire more revenue from the market. Secondly, small company may need to issue higher debt yield bond to attract institutional investor   to invest in it. Thirdly, with little capital compared to the peers, it may have higher business risk when the bad time has come. That is why, we hardly see institutional investors spending time in investing in those small cap counters. 

Nonetheless, if we could have out hidden value in the small cap counter, it can produce a very high return to investors. Let's take Sino Grandness as an example. 

Sino Grandness Chart. Source: Shareinvestor.com

Sino Grandness reached all time low at May 10, at below 25 cent. It is however gaining momentum in last couple of months and reached more than $1.10 in April 13. I would say the result is quite fantastic. Why do I say so? Sino Grandness is a S-Chip counter. Normally investors will avoid in investing long term with S-Chip counter due to  financial scandal happened on some S-Chip counters. The market cap was lesser than S$100M 3 years back and now stands at more than S$300M. What are the reasons behind to push the market cap from as low as below S$100M to now more than S$300M? I think it could be due to the following reasons:

  1. Growth Factor: The company transformed to Beverage producer from pure Canned Food exporter to Europe and America after listed in Singapore Stock Exchange. As it entered higher profit margin sector, the ROE also considered to be in higher range. Secondly, it enters in China domestic market, which is an emerging market that enjoys higher growth in coming years. With the changing of demography has taken in place, more residents are staying in cities, and they prefer faster and healthier F&B. 
  2. Public Awareness: More research houses cover this counter in recent months after the company reach another new high in its revenue and earning. The most important catalyst could be the listing of its subsidiary - Fresh Garden in Taiwan / Hong Kong market. As I noticed, the CEO of the company keep on pushing the Fresh Garden distribution network into deeper and smaller tier cities and had campaign in advertising the brand "Fresh Garden" to country level. Having more distributor networks allow the public to take notice of its loquat juice series in domestic market. 
  3. Institutional Investor Buying: After release of 2012 FY result, we received news on private placement by institutional investor at 82C. I think this is an encouragement to the company to further expand its business in domestic country. 
Nonetheless, we should be aware of the possible failure of its subsidiary getting listed in Hong Kong / Taiwan market. It can bring a huge penalty in failing to do so. Let's try to find out more small cap counter and hope it can grow to a bigger cap counter in coming years. 


No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...

View All My Posts Here