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In this ASX Small Cap Video, Small Cap expert Richard Hemming talks about finding Small Cap ASX Stockss to buy and the buying opportunities that Under the Radar Report is finding for ASX Share investors. He gives you Small Cap stocks to buy plus he talks about the economic uncertainty and why we are finding value in the Small Caps right now.
What ASX Small Cap company’s reveal under the hood.
This week we look first at what drives a small caps share price then we move on to why volatility is good for ASX share investors. This leads onto why now is a good time to be looking at a small cap company’s fundamentals and what’s coming up in reporting season.
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What drives ASX share prices?
Sentiment versus fundamental value
When you have big shocks in the stock market there is a great deal of uncertainty, which manifests itself in increasing volatility or sharp share price movements.
Volatility is good for ASX Share Investors looking to Buy ASX stocks!
Why is volatility good? Because it produces buying and selling opportunities for ASX small cap stocks. When there is market uncertainty valuation gaps can occur, which is where there is a big difference between the fundamental value of a company and its share price.
This is what our small cap analysts are searching for. We are looking for fundamental value in ASX small caps, which is based on the small caps earnings outlook and balance sheet.
Why is volatility increasing on the ASX Share market?
Last year the rally in stock markets including the ASX was due to multiple or PE expansion; on the back of central stimulus and low or falling interest rates. This represented a significant turnaround from tightening to stopping the tightening to easing interest rates.
This year, for the ASX rally to be sustained, given the additional liquidity from central banks is already priced in, there needs to be need growth in earnings or earnings per share (eps).
The coronavirus is the X factor and it’s too early to quantify its effects, but at this stage the risks are rising; reflected in stock market reaction in the past few sessions. You have to remember that there is a great deal of hype out there. Stories are written to be read.
On top of the coronavirus you have the bush fires in Australia and the trade war between the US and China.
Is this a buying opportunity for ASX Share Investors?
Volatility means that there can be big discrepancies between a company’s share price and its fundamental value. This is why the hard numbers, updated financials, we’ll be getting this month from many ASX small cap companies are so important.
If you remember back to the fear that was present when Brexit was a reality in mid-2016 after the plebiscite. Since then the UK FTSE 100 has returned over 20%.
How do you find those ASX Small Cap buying opportunities?
It’s worth repeating what we’re looking for at Under the Radar: GROWTH!
Small Cap Stocks are ignored by big investors – fund managers because they are too small to make a difference; and consequently these stocks are also ignored by stock brokers because there is not enough volume traded.
These gaps provide opportunities for retail investors in ASX shares that have significant operating leverage. Small Caps have a lower or smaller cost base. For every dollar of sales, because a majority of costs are fixed you get more profit growth. This is why the market likes technology/software companies that have unique IP and early mover advantage and a global market allowing them to quickly leverage their cost base.
Afterpay (APT) is a classic example but there are many more GBST (taken over) and Catapult (CAT).
EIGHT Technology Small Cap Stocks to Buy now
More to the point, we have some EIGHT companies in technology related fields that we have buy and spec buy ratings on right now.
How do you know when to sell your small cap shares?
Critical to find a small cap growth company that is accelerating, which is also why you need to Take Profits on these momentum type ASX Small cap stocks.
If it doesn’t happen and growth decelerates you get issues.
We’re covering Nearmap (NEA) where we’ve seen some evidence of that, plus customer issues resulting in a share price correction.
How does Under the Radar reduce risk?
Taking profits is a good way to reduce risk, another is diversification. Under the Radar Report runs a number of ASX Share portfolios in the big and small cap segments.
We show you how to set up a portfolio and how to run a portfolio. We also give you clear buy, sell hold recommendations.
This reporting seasons we’re looking forward to the many opportunities to buy small cap shares that arise during this period.
Frequently Asked Question
What is reporting season?
Reporting season or earning season is when ASX listed companies must report to the ASX on their financials and targets. This happens twice a year when they present yearly and half-yearly results. It is particulary important for ASX Small Caps as it is an opportunity to really analyse their financial performance and check under the bonnet!