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Buying my First Small Cap shares: Choosing which shares to buy

Caroline Mark

I'm feeling elated - I've bought two small caps, I've started my small cap portfolio and I'm on my way. As you know, I'm starting to buy one stock a month so I can start building up a portfolio. Better late than never!! I'm using the money I've saved in that month. I'm not using a saved fortune just what I'm saving every month.

When I say I'm elated, what I meant was I was really scared. Investing really does take courage and although I'm a risk taker (I've started a business - that's proof enough), investing in the share market DOES NOT come naturally to me. I would have chicken-ed out ( a technical term) if I could have.

But it is fun! (Now I've hit buy). Before I hit buy, I spilt coffee all over me and I had to go home and change... 

An image of a computer small caps

So which small cap share did I buy? and how did I choose which shares to buy?

Today is Small Cap report today. We have a very cool Best Stocks to Buy list on our which has been updated after the August reporting season. Reporting season is just the market jargon for when every company on the ASX has to report on their results giving financials and an update on their market outlook.

Six Best Small Cap Stock to Buy

So our Best small cap stocks to buy list has been updated after the results and has SIX Small Caps on it. These are the shares that our analysts believe offer the best risk/return now. The average return of our Best Buys list of small caps over the past eight years is above 60% per recommendation.

Trusting Our Share Analysts

I've already told you that I spilt coffee and was feeling extremely nervous but if I'm going to carry out my strategy of actually buying shares to invest for my future I'm actually going to have to select a share and hit buy! It's decision time and I'm trusting our team of analysts. I sit next to them all day every day and I  know them all well. They are not sparky 20 somethings that are all a bit gung ho, they are all yes, heading towards 50 or on the other side of it, they are careful analysts who really love digging behind the bonnet of the company financials (this is not my thing) and I trust them. They all invest themselves and they know the market well.

Do they always get it right?

Of course not. I know that because sometimes they slam their feet and swear when a stock doesn't do what it was meant to and they rapidly call management and interview them and re-do the figures. But I also hear pleasure when a small cap is taken over and the share price goes up, or a contract is pulled off and the shares are re-rated (fancy word for the stock price goes up). The point is, they live and breath these small cap and blue chip companies that we recommend.

I don't have the skills, the experience or ability to judge if a company is worth investing in, but they do, they are independent - there is nothing in it for them personally or for our business to promote a stock, they are just doing because they believe it's a good investment.

My Share Analysis

But they can't tell me which small cap stock to buy, they have a pool they have recommended - so which stock did I buy? (I bought two actually - greedy greedy me!).

So, I looked at the six small caps on our best stocks to buy list. I read all about them. It took about 5 minutes over the 2nd cup of coffee I bought this morning... And it was fun reading about the small caps! Suddenly, now I had the intention to buy the shares, it was like a great shopping experience with all the thrill of anticipation. I can see that once I get over the nerves (and maybe this is just me, and you will be as cool as a cucumber), buying shares is going to be quite exciting.

Building a watch list of shares

Traditionally you are meant to buy a watch list of shares (really a short list) of shares that you are interested in buying. There were three that really took my interest. I ruled two out quite quickly - one was in sports technology (yawn yawn), one in media (I'm in publishing and I'm over exposed and don't need more analysts/journalists in my life), one was a contractor (building in the major capitals - was probably sensible but I'm not addicted to property) so I was left with three of interest.

A Diversified Portfolio - look at different industries

So I'm down to a choice of three small cap shares to buy. One is a data centre operator (boring, but demand is always going to be strong isn't it), a little miner (I feel guilty about the earth but my capitalist bones spark interest), and a medical device specialist (could this be the next big thing)?

Level of Risk - knowing your own risk profile when buying shares

We have two levels of Buy - Buy and Spec Buy or Speculative Buy. Spec Buy means is riskier, but there are often more rewards. But you can lose out with spec stocks too. It's taken me so long to get started buying shares that right now my risk profile is pretty low. So let me explain which small cap shares I bought!

Small Cap: Macquarie Telecom (MAQ)

I bought 110 MAQ shares this morning which cost essentially $2,500 (give or take a few dollars). They aren't 'cheap' shares at $22.75 each. But this is a very stable business, it's been listed for nearly 20 years, they have long-term contracts, the shares are predominantly owned by two brothers who run the business, and it's performed long-term. I'm going to do a case study on MAQ and put it up online because it's a classic small cap tale.

Under the Radar first covered this small cap share in 2015 at $6.51 we had a buy on it right up to about $8 and then the company did one of their major re-investments and the share price dropped to about $5 and it stayed there for years... Subscribers used to call me and say what do we do, and our analysts repeated, just hang in there, we still really like this company blah blah blah. But then it roared up $10, $12, $14, $24!! It's just dropped back a bit and our analysts believe it's a buying opportunity as this company is building another data centre and they see the cycle repeating itself. So, instead of doing a Sirtex and being cranky I didn't buy at $7, I've bought a holding at essentially 3 x that... eek!

They have paid dividends in the past, they probably will again, they have strong growth prospects and it's an established business. Even if there is a dip in the share price for a bit, I think this is a good long-term investment.

But I bought Two Small Cap Shares!

I also bought Panoramic Resources (PAN). This is a spec buy, yes it's speculative! It's a little miner - I know my blue chip share I bought last week Alumina is in resources but it's a big established player. PAN is a little company and it is producing. So, I know this is risky, I know this is not 'diversifying' into another area that I'm not already focussed in but I'm Australian and we know Australia's wealth is from mining (poor sheep are struggling these days with a hideous drought/climate change) and I want to see if a little miner can strike gold! (well nickel, copper and cobalt to be precise). 

I'm just having some fun with this so I'm being cautious and I put in $1000 (I played around and I actually bought 3,000 shares - I noticed if I bought 3,100 shares brokerage went up to $20 but at 3,000 (just around $1,000 it was only $12).

So there you have it. I now have one Blue Chip share, a reliable small cap share and a more speculative small cap. 

I've been brave. Alumina have gone up 7.6% and I'm in the 'green'. MAQ and PAN - because of brokerage, I'm in the red, but let's be patient and see what happens.

Wish me luck!

I'm going to have my head down and save my pennies to see what's going to take my fancy next month when I buy another share.  Next week I'm going to learn more when we have a big small cap portfolio review next week and I'm looking forward to reading what our analyst 'The Idle Speculator' has been doing. Richard Hemming is also interviewing a few fund managers who are answering:

  • What do you wish you knew when you first started out share investing?
  • If your'e not a professional, how much capital do you need?
  • How much time do you need and does the individual investor have any advantage?
  • How can small caps help?
  • Big ASX Share winners and losers

But where am I going to get my next share to buy idea from?

We have a NEW small cap stock we are researching now that Richard is really enjoying investigating, and we are also looking at a portfolio of small caps that pay dividends. They all sound good to me!

 

 

 

 

About the Author

Caroline Mark

Caroline Mark is the Founder and Publisher at Under the Radar Report, which provides independent ASX share research to help build investor’s share portfolio. Under the Radar Report is licensed to give general share financial advice only (ASFL: 409518). The author is not licensed to give personal financial advice and this commentary is for general information only.

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