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Under the Radar Report - investment newsletter

We are a niche Investor Newsletter covering small cap stock and shares in the ASX listed small companies that are not reported on at a satisfactory level anywhere else – including the mainstream media. And it is these dynamic small companies that offer the chance to multiply your returns… but more of that later.

Obviously investing in small caps does not come without risk, and as we explain in our Portfolio section, everyone should have between 15 and 25 per cent of their investment allocation for equities devoted to small caps.

Why Under the Radar Report?

 Under the Radar's team led by Richard Hemming, have been researching and reporting on small caps for more than 15 years.

Assisting us in our endeavours is a high powered investment committee, whose members include Geoff Wilson and Karl Siegling.

Radar also has access to independent experts within the small cap sector such as fund managers and analysts, as well as the management and boards of the companies we are researching and reporting on.

Specifically, what does Under the Radar Report offer?

Under the Radar Report provides ideas on investing in the specific area of "small caps", or small listed companies on the ASX. We are independent, which means we are not affiliated with any stockbrokers or investment advisers, whose advice can be self-serving because it is based on corporate fees and commissions.

Radar's "small cap" market refers to companies listed on the Australian Stock Exchange (ASX) with market capitalisations between $20 million and $300 million.

We cover all industry sectors. The 1500 or so companies we investigate includes everything from gold miners to information technology companies to biotechnology. Because of their small size, these companies are rarely covered anywhere else.

You will receive our investment newsletter fortnightly and subscribers gain full access to our website, which includes:

  • Stock market tips
  • Sector reviews
  • Interviews with successful fund managers
  • Our model portfolio
  • How to make money made simple in our "Smarten up" section
  • Comments from industry heavyweights

Why Small Caps?

Investing is about making money and here are some key points which explain why small caps should be a component of every investors' portfolio:

  • A lack of information…The Australian small cap market is notoriously inefficient. Unlike bigger companies, few, if any analysts' forecasts exist for its revenues and profits. There is also little idea of whether or not the company will need to come to investors for capital.
  • Which means opportunities to make money…Precisely because of these inefficiencies, the only area where fundies outperform the market is in the small cap arena, according to ratings agency Standard & Poors.
  • Small caps offer an essential avenue for retirement preparation, because they can generate capital growth for investors.
  • This is because small companies offer leverage – both operationally and financially.
  • Leverage means you are much more likely to double in size if your market cap is $100 million, than if it is $1 billion.
  • Small companies provide diversification from how the economy performs. A small company's earnings growth is based more on increasing its market share, than on how the general economy performs. It is coming from a very low base, so if you believe in the story, there is every chance it will achieve just this.
  • A small company can grow its earnings by increasing its market share from 1 per cent to 5 per cent. A large company with market share of 50 per cent will be basically defending its position.
  • Small cap ASX listed companies provide the only opportunity for investment in businesses that have management that are both entrepreneurial and experienced, to varying degrees. The exciting part of being invested in this sector is watching businesses grow.

Our Portfolio Manager, The Idle Speculator, 20% returns a year over 20 years

Since starting his investment life with Fidelity in London, he has returned an average of 20 per cent a year over 20 years. 

This is no accident and much of the return is due to picking winners in the small cap space. These company's offer more chance to make big returns than any other asset class.

Some recent wins in the Australian market include:

  • Village Roadshow (VRL) - he has made a return so far in the region of five times his original investment; and hasn't sold!

  "I haven't had to sell any and have got my money back more than twice; that's the best experience as an investor you can have."

  • Webcentral - he doubled his money in the internet hosting company after a takeover by Melbourne IT (MLB) and now receives a dividend yield of 10 per cent;
  • TPG (TPM) - has not sold this telecommunications provider, but has made almost four times his original investment, not including dividends, and now is making a dividend yield of 12 per cent;
  • Unwired - this telco is not listed any more, but he doubled his money in the space of six months;
  • Mikoh (MIK) - a "highly speculative" investment according to our PM. This company provides security around barcode labels. He has sold out of 90 per cent of his original holding but has made more than 10 times his original investment.

Getting into the Under the Radar Report portfolio

What do we look for?

  • Growing sectors
    In another life, one of our analysts was a gaming analyst, rating companies that operated casinos, poker machines and wagering businesses. It became clear that no matter how good the management was, it didn't make a difference. Anti-smoking laws and a general crackdown via increased regulation by the state of gambling meant that the profits of the whole industry were contracting. It is always good to have a top down view of things.
  • Cash is king
    In the financial crisis it was obvious, but the rule always applies: Cash is king. No matter how rosy the investment climate may look, it is important to look at the balance sheet to see what financial engineering is going on behind a company's returns. If you are in an investment for the long term, you want to be sure that the assets the company lists can be sold and that it is producing a solid amount of cash after paying for its day to day requirements as well as those necessary to ensure its profits grow in the future. The ratios we like to look at include a company's book value (its net assets), its forecast price earnings ratio – with an emphasis on the E in PE, and the amount of interest it is forecast to pay, relative to its earnings before interest payments and tax.

    In the case of mining companies and biotechs, there is a different orientation. Here we look at the cash burn rate and what the likelihood of raising capital is. Raising equity isn't the worst thing in the world, but you want to know that there are performance hurdles the company will meet in the near term that will help raise investor sentiment (meaning its share price). Also, a clear understanding of when the company will be cash flow positive and not need any more cash injections is critical.
  • Company's share price
    The chart. Even if, like us, you are sceptical of technical analysis, the graph of a company's share price always tells an interesting story. Although the chart won't tell you how to invest for the long term, it gives the best idea of the sentiment that any given stock/sector/market has experienced over differing time frames. This is a big aid in timing your decision to jump into or out of a company and whether it is regarded overall as a consistent performer by the investment community. Those looking to delve a little further could possibly look at the beta of a company, that is, how it is correlated against the market. But I believe that the one-year and five-year charts are good enough indicators of investor sentiment.
  • Management
    Whether talking to management or not, it is important to gauge their performance. You need coherent explanations of past performance as well as what their plans are for the future. Management needs to both talk the talk and walk the walk.
  • Bull Points/Bear Points
    What are the positives and negatives of the company from an investors perspective? This must be done with as much objectivity as possible.
  • Valuation
    For an investor, everything really comes down to this. Having a clear idea of what a company's valuation is makes it easier to make buy and sell decisions. Our decisions are based on simple valuation methodologies such as price earnings multiples and analysing the present day value of near-term forecast cash flows.
  • Catalyst
    What will happen in the future that will lead to a stock moving towards the valuation we have chosen. Underlying this is the primacy of timing. In investing timing is important, although rarely do people get it right. We have a believe that the main thing to do is to buy and hold. Patience is one of the biggest virtues and investor can have.

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"It's great to see one of the sector's best commentators in action. "
David Paradice
Founder of Paradice Investment Mangement
"I've noted some of Richard's stock picks in the Sydney Morning Herald. He is someone both investors and companies should listen to. "
Gary Weiss
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An investment analyst and
financial journalist and small cap specialist.
Richard is the editor for
'Under the Radar Report'.