Quality Small Caps to Buy in 2022
31.5% Average Return in just 3 months from our SIX Royal Small Caps.
Only THREE months after recommending these SIX quality 'Royal' Small Caps, they've returned over 30%.
Find out how we did it and do it yourself!
How do you grow your your wealth, in fluctuating markets?
You buy Small Cap Royalty.
It's one of the things we did in the selloff in June (Issue 503, 23 June 2022) and we’re doing now, is to focus on quality in the small cap world.
This strategy paid off handsomely, delivering an average return of 31.5% from 6 Small Caps. We give you 21, find out now!
Royal Stock #1: A strong balance sheet & operating model
The first stock we recommended in June 2022 was Allkem (ASX:AKE), a globally significant lithium producer. They have 10% of the world's share of the lithium market and are able to self-fund their own expansion.
Allkem (AKE) returned 57.1% in 3 months to 14/9/22
What defines AKE as a quality company?
Put simply, we’re looking for strong balance sheets and good operating models with highly competitive business positions. These companies are able to generate earnings growth even in difficult market conditions. More to point, during market-wide sell offs, where the proverbial baby is thrown out with the bath water, these Small Cap Royalty stocks are on sale!
Allkem's niche as one of the largest lithium producers, its use of proven hard rock lithium mining, and leverage with EV and Battery producers means that the company is consistently strong in spite of market conditions.
Royal Stock #2: Management and Customers
Data#3 (ASX:DTL), is a company specialising in corporate IT, with a niche in digital cloud services.
Data #3 (DTL) returned 38.9% in 3 months to 14/9/22
What defines DTL as a quality company?
What you’re looking for is the quality of the customer base, either in terms of tier one relationships with top 100 companies (Blue Chips) or having literally hundreds of thousands or even millions of customers who are taking a standard offer. The level of customer quality highlights that management are doing more right than wrong, the customers being the life blood of any business.
DTL's niche in digital cloud services, their proven capacity to adapt to emerging trends, and their strong balance sheet, saw them perfectly poised to take advantage of Covid's digitisation of the workplace. Now with a large and diversified customer base, DTL is hedged against rogue customers, and has strengthened their balance sheet and business for the better.
Royal Stock #3: The Balance Sheet
NZME (ASX:NZME) is New Zealand's market leading newspaper and radio company, with 37% of its target audience share in audience, and 41% of the overall market revenue.
NZME (NZM) returned 7.1% in 3 months to 14/9/22
What defines NZM as a quality company?
The key here is asset duration exceeding liability duration. You want to be comfortable that a company can fund its requirements under all circumstances, as well as growth.
NZME weathered the storm of Covid and rising inflation, by maintaining its balance sheet. consistently increasing its revenue, although small, in the face of rising pressures. The company has consistently paid dividends, but is able to recognise the value in reducing its debt, maintaining its strong balance sheet.
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Royal Stock #4: Operating Model
OFX Group (ASX:OFX), is an Australian foreign exchange company, that specialises in Business to Business interactions, and high value customer transfers and exchanges.
OFX Group (OFX) returned 20.9% in 3 months to 14/9/22
What defines OFX as a quality company?
A company that has low capital requirements will, all things being equal, find it easier to deliver a superior return on equity. Not all businesses have low capital requirements, but if they have high capital requirements, you will want to be buying a business where there are high barriers to entry, which should entail high gross profit margins.
OFX's business model is a great example of low operating costs, as its core business is based on transferring intangible assets. As such its core cost is growth, acquiring companies to provide leverage into new regions and market share.
Royal Stock #5: Competitive Position
Southern Cross Electrical (ASX:SXE), is a eletrical engineering contractor, with a wide array of companies and contractors under its wing. It services a wide array of sectors and industries, with its most notable contract being the Western Sydney International Airport for over $100m.
Southern Cross Electrical (SXE) returned 26.7% in 3 months to 14/9/22
What defines SXE as a quality company?
You want to be sure that your stock isn’t competing with a gorilla in a market where it is getting squeezed out. It either has to be low cost, which involves scale, or it has to be differentiated in a way that can be sustained.
SXE has found itself a niche, acquiring experts and professionals in a broad array of sectors. This method protects itself from sector instability, and allows it to easily leverage itself into emerging industries, such as the electrification of industrial companies and development of green energy. Leveraging itself for success.
Royal Stock #6: Assets
Austal (ASX:ASB) is a shipbuilding contractor situated throughout the pacific ocean, in America and Australia. Specialising in defence and commercial ships.
Austal (ASB) returned 38.2% in 3 months to 14/9/22
What defines ASB as a quality company?
Your starting point is what is behind all the other numbers on the balance sheet (apart from the company’s liquidity in the form of cash and debt). I’m talking about how easy is it for the company to deploy its fixed and operating assets to meet its competitive challenges. These assets might be people, plants or equipment.
ASB is a great example of Asset strength, through its ship construction and maintenance yards on the pacific Australian and American coast. While shored up by physical assets that are far too expensive to simply replace or find elsewhere, ASB is able to leverage small but consistent maintenance projects, against much more profitable construction deals.
Learn more about Small Cap Investing. Why these ASX Small Cap jewels were chosen, as well as their excellent performance.
What's the Takeout for Investors?
You’ve got to be in it to win it. These stocks give you a great opportunity to buy quality at small cap prices.
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Overall, any of these stocks can be used to demonstrate any of the above criteria, which is what makes them great stocks, and is why they have consistently returned growth to investors. The perfect investment in spite of market conditions.
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