We look at Macquarie Telecom and how patience can be rewarded for the individual investor in Small Caps. Our motto at Under the Radar is: Buy Cheap and Be Patient. It has helped us generate an average return of 35% in the past seven years. In last week's issue, we cover the 24 new stocks for 2017-18, which have delivered an average return of over 20%.

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GREED AND FEAR TRIUMPH IN THE END

Macquarie Telecom (MCT)
When I spoke to Macquarie Telecom’s CEO David Tudehope a number of years ago he evinced frustration that his company’s transformation from a telecom reseller into a software as a service cloud operator wasn’t being reflected in a growing share price. The small company’s shares had slipped from about $7.50 five years ago when we covered it to as low as $5 and were edging their way back up in early 2016 but were stubbornly below $10.

Tudehope was also spruiking his company’s new customer service strategy of rigid adherence to the net promoter score system out of the US. Then he dropped his voice: “We went to Melbourne and spoke to The Oracle and he told us that we will be okay because fear and greed will attract the fund managers in the end.”

PERPETUAL SELLS OUT NEAR THE LOW POINT

The fear factor was particularly relevant at this point, I might add. Putting pressure on the stock was that the company’s biggest fan, was exiting, stage left. Perpetual had sold out of its position, which at one point was over 13 per cent.

What caused that fear?

Macquarie had hit a few hurdles and missed earnings targets because its transition from traditional people based IT consulting into the cloud based hosting model meant lower profit margins combined with significantly higher capital expenditure (building a data centre is not cheap and MacTel now has four). Another factor was that MacTel had secured government contracts, which, while impressive, weren’t delivering the immediate cash flow that the market desired to generate a return on the hundreds of millions it had spent. I think they cut the dividend one year. To top it all off, the company had embarked on an expensive project called “Ninefold”, which I understand employed coders to develop apps for corporations.

A PERSONAL SUPER FUND?

Some fund managers that I had spoken to complained that MacTel was run like the Tudehope brothers’ superannuation fund, referring to David and his brother Aidan, who combined own just under 60 per cent of company. I remember that Perpetual was particularly annoyed with Ninefold.

But it was after Perpetual’s sell off that the company’s shares started to really improve. In fact, the current share price is about four times its level in mid-2015. In the past 12 months alone MAQ has climbed 47%, having recently breached $20, helped along by news of a six year wholesale supply deal with the NBN valued at more than $100m.

You see, David Tudehope and the fund manager were right: fear and greed do win the day. But it is individual investors who have a distinct advantage in this regard, even if it’s often not apparent.

If you are interested in learning more about Blue Chip Stocks and how to invest in this area, read more here.

THESE ARE SOME OF THE ADVANTAGES TO BEING SMALL IN THE INVESTMENT WORLD:

• If you believe in the Tudehope’s strategy, but it’s not working out, an individual can put the stock in the bottom draw. Unlike a fund manager, who is almost forced to sell, the investor doesn’t have to worry about quarterly performance reporting to unit holders.

• You don’t need to hold as much stock to make a meaningful difference to your portfolio. The liquidity of a stock is much more relevant to big investors trying to gain a foothold. A stock that doesn’t trade much can be very expensive for a fund manager to obtain a meaningful position.

• An individual investor doesn’t have to worry as much about the (hopefully) short-term weakness that might occur when a company misses an earnings target.

• Often fund managers measure their diversification against the sector weightings in the index that they are benchmarked to, like the S&P/ASX 200. Between resources and banks, the weighting in the ASX 200 amounts to 40 per cent or so. To weight your portfolio this heavily to these sectors is ludicrous.

• An individual’s portfolio is not competing against the ASX200 Index, like your average fund manager is. This means you avoid such a big concentration in two or three sectors and can simply use the different segments as a guide to more effective diversification.

“The Oracle” I found out later, was a fund manager; and Ninefold has gone the way of the dinosaur (after Perpetual sold out).

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