We have been a beneficiary of the takeover activity in the sector. This year alone there have been 3 takeovers in the sector in Australia worth over $2.2bn. Globally there has been some really big takeovers. Most recently Dublin based Shire Pharma was taken over for $40bn by the Japanese giant Takeda.
Basically Big Pharma is realising that it’s better value for them to take-over small biotechs which have a track record of research success in order to renew their big pipelines of patented drugs.
In January Pfizer actually announced it was closing its neuroscience division, which meant letting go of 300 people. In its place it’s creating a fund dedicated to cherry picking the assets of small biotech companies.
This is a big theme and one Under the Radar is positioning to take advantage of.
What can Small Caps add to someone’s portfolio?
In one word, “growth”. Basically, if you own some big stocks you’ll achieve at most market returns, which is something around 10% a year, over the long term.
What small caps can do is supercharge your portfolio for three reasons:
1. Because they’re small you can achieve above average growth. It’s much easier to grow if your market cap is $100m than if it is $10 billion.
2. They are often not correlated to the market; so they can improve no matter whether the outlook for the overall market is flat.
3. Often they are not known by the market – they’re too small to be of interest for fund managers and therefore, for brokers. What we are looking for is paying value prices for stocks that are growing quickly. Once the market catches on to that, you get that double whammy, which is how to make big returns and boost the return of your overall portfolio.
How do you know when to Buy and Sell?
The $64m question! Recently we bought into the point of payments provider AfterpayTouch (APT) at $2.50 and took profits at $7.40.
Knowing when to sell is always hard but we felt that the stock was starting to price in unrealistic assumptions about success in the US; and we were also aware that ASIC was looking closely at its business model, because under the current structure the company doesn’t technically provide credit because they don’t charge interest. This is a pretty narrow interpretation in our view, which will change.
We put this out there and some subscribers have even made money shorting the stock!
But this sort of stock is one of the many momentum stocks, which we were lucky enough to grab a hold of and not get bucked off.
Another such stock is the logistics software provider GetSwift (GSW), but we have taken a close look at this stock after it got whacked. It’s gone from raising $75m at $4 to current levels of below 50c. That’s quite some fall and because it trades below cash backing of around 55c we had a look at it.
The long and the short of it is that this stock is leaking money and won’t be cash flow positive any time soon.
The key here is that at Under the Radar we’re constantly looking for value, whether it’s buying, or selling.
What’s coming up?
We’ve got more issues looking at the med-tech sector, but we don’t stop there.
We’re looking at other themes like Australia’s ageing population and how to take advantage of that. We’ve been making good money from retirement communities specialist Ingenia Communities (INA), but we’re looking beyond this stock.
We’re also looking at the financial services sector. There has been some big focus on the banks and the lack of competitiveness there. We believe the shadow banking sector offers some good opportunities at very cheap prices.
Talk about the small cap community?
One of the features of Under the Radar is that we encourage the small cap community. In this regard, we are always answering questions from subscribers and we’re also providing them with tips from some of the top fund managers in the sector. We’ve got some valuable lessons from these people because if you made all the mistakes they did, you’d be broke.