Undervalued Stocks: 3 Small Caps Stocks to Buy

Richard Hemming
Volatility is a share investor’s friend, although it doesn’t seem like it when you look at your ASX Stock portfolio’s valuations.

I’m always looking for small cap stocks that are good value and when times like this come about, it’s much easier to find small caps that are high quality at bargain prices.

These are the sort of small caps that can remain in a share portfolio for a long-time and are certainly worth paying a premium for. You know what I’m talking about. If BHP halved in price tomorrow, you would want to buy more. This is an ASX stock that is going to be around forever. What I’m talking about are the BHPs of the small cap stock world.        

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Small Cap Stock: Austal (ASB)

Last month small cap stock Austal reported another great result, increasing revenues 22 per cent to just over $1bn for the six months to 31 December to produce NPAT up 72 per cent at $41m, underlining how this small cap churns out strong profits whatever the global economy is doing.

The small cap shipbuilder with global operations is one of the highest quality ASX small cap stocks we have ever covered, yet because of its lumpy earnings streams the stock market values this stock as a small-mid-cap. The small cap has clients that include the Australian and US governments; there is great operational complexity; high barriers to entry; it has built a powerful niche, having invested vast amounts of capital in its operations and its highly skilled workforce.

Yet at the time of writing small cap Austal’s ASX shares are down 26 per cent in the past two weeks. A buying opportunity for a big company in a small cap.

Small Cap Stock: Cooper Energy (COE)

We would classify the small cap oil and gas producer as emerging quality. It has been disappointing that Cooper’s Sole project off the coast of Victoria in the Gippsland Basin, has been delayed by six months, but this has been due to factors outside the small cap company’s control.

Sole really is a game changer and it’s important that production guidance has not changed, simply delayed and is due to commence later this month.

The small caps current production rate is 3,300 barrels of oil equivalent a day. Sole is expected to produce 11,000 barrels a day. Sole delivers on Cooper’s strategy to provide gas to South East Australia with 6% of annual requirement.

One risk in this ASX Small Cap Stock is debt. Having been through construction, Sole is entering the operational phase, which means its debt will be paid down. Another is the gas price, which has been weak. Cooper has 87 per cent of its planned production to June 2022 in take or pay contracts.

Cooper Energy has many strands to it and recent price weakness provides a good opportunity to gain exposure to a small cap ASX listed stock that has delivered on its promises and has a big future.

Small Cap Stock: CountPlus (CUP)

Kerry Packer once said “Son, you only get one Alan Bond in your life time and I’ve had mine,” after he sold and rebought Channel 9, generating a fortune. Well, CountPlus shareholder Barry Lambert and former Count Financial executive chairman could well say the same about the Commonwealth Bank.

The accounting/financial advisory group is another small cap ASX listed stock that could be considered another “emerging quality” because of the transformational element in its acquisition of Count Financial for a bargain basement price in October last year from the forced seller Commonwealth Bank. CountPlus paid $2.5m to get net assets of $15m, no debt, $12m of cash and 359 financial advisers across 160 firms.

CountPlus is a small cap stock that is conservatively managed accounting led and financial advisory services business. This small cap has a strong balance sheet, is paying dividends and is ahead to the pack having largely transition to a fee for service advice model. Its interim profit result released in late February showed that this small cap stock is successfully replicating this model, which gives us confidence that before long this small cap will live up to the hallowed “Quality” label.
 

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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