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CHOOSING THE RIGHT SMALL CAP SHARES TO BUY

You need to invest in 7-10 ASX listed Small Cap Shares to position your share portfolio for growth. So How do you know which ASX Shares to buy?

Under the Radar Report provides expert ASX small cap share research to help you confidently choose your small cap shares and we provide ongoing updates advising you when to Buy/Hold/Sell your small cap shares. You are not alone. We will help you choose which small cap shares to buy.

We also have an easy to read 'Best Stocks to Buy' table which is published each week in our Australian stock report. These are the small cap stocks our experts agree offer value for money and the best risk/reward return right now.

NINE steps to choose which small cap shares to buy

At Under the Radar Report we help ASX Share investors choose which small cap shares to buy. Our expert analysts have selected 100 small cap stocks and we have our Best Stocks to Buy table so you can choose which small cap shares to buy right now.

We know that it's hard choosing which small cap shares to buy and that it takes courage to invest. Our team of expert analysts have chosen the best ASX shares to buy. But we also will help you to learn more about investing.

We are the share experts, and you don't need to be when you join us Under the Radar! But the part you need to do is think about your portfolio structure and about the amount you invest. It's not hard, let us help you get started here:

1. How Much Cash do you Want to Invest in ASX Shares?
How much cash do you want to invest in these ASX stocks? We always recommend that you follow our portfolio structure.

2: Don't forget Your Share Portfolio Structure
Set up your Share portfolio following the basic rules of: cash (0-25%), small caps (20-30%), and blue chip ASX shares (50-75%). Blue Chip ASX Shares will always be the mainstay of your portfolio but you need small cap shares for growth.

3: Where is the Overall Share Market Trading?
Under the Radar Report will provide you with share buy recommendations that we believe are strong investments right now. See our Best Shares to Buy table in our weekly Small Cap Stock Report which shows you which small cap shares you could buy now. Also, take a minute to think about the value of the overall share market. If you think it’s expensive, don’t put all your allocation for stocks into the market all at once. Or if you think the share market is in a dip, it's a very good time to invest.

4: Best Small Cap Stocks to Buy
Look through our Small Caps Best Stocks to Buy table plus the week's latest small cap research. It is worth jumping in online and searching the small cap stock to find all the share research. It is very easy to do and we keep you up to date on our latest views and recommendations. Don't forget to consider your income needs and to choose ASX shares and ASX small cap shares that pay dividends if you need to generate income not just growth.

5: Creating your own Watchlist of Small Cap Shares
List 5 or 6 Small Caps that you like and put them on a small cap share watch list, along-side another 10 Small Cap shares that you are not sure about, but that could be interesting. Look at the share charts and whether or not they pay dividends. We list all the forecast dividend yields for each small cap stock we cover online under the 'All Stock Research" tab in both our Small Cap Shares and Blue Chip Value ASX Shares.

7: Investment Ratios and what the Averages are
It is good to keep in the back of your mind that the average PE of the market is about 14 times for industrial stocks and 8 times for resource producers. Based on the PE you can get a clear idea whether you think a small cap stock is over or under valued. Don't worry if you don't know about PEs and other ratios yet. Our analysts have it all covered and really all you need to do is read our famous green 'Radar Rating' which is a quick snappy summary of the share and our recommendation. When you are short on time, like lots of our subscribers are, it is a perfect time saving investment tool.

If you would like to know more about some key share investment terms we have an easy to read page of share market terms that apply to both small cap stocks and blue chip shares.
 

8:  Small Cap Shares to Buy
With the knowledge you get reading our independent expert share tips and research, jump in and buy small holdings of those ASXB lue Chip Shares and small caps that you think are right for your share portfolio.

9: Keep up to date with our Share Recommendations
Watch your share investments like a hawk and keep reading Under the Radar Report for research updates. We always review the company's results in reporting season (August and February) plus at other times during the year when there is news that will influence the share price. Just open the weekly email to see if your stock has been listed and when you are short on time, don't worry, the email tells you if there has been a change in recommendation, and if you own one of the shares we cover that week, jump in and read the green 'Radar Rating' and in a few sentences you will be up to date!

Follow our advice, we're performing well.

 

We are outperforming the market, click here to see how we're doing it.

And don't forget to take out free access so in one click you can see which small cap stocks you should buy right now.

GETING UNDER THE BONNET: WHAT UNDER THE RADAR REPORT LOOKS FOR IN A COMPANY’S PROFIT RESULTS

We know you are busy and don't have time to be reviewing all the ASX shares you want to own. Our job is to hunt for undervalued small cap stocks for your share portfolio. Our experts (and yes, all our analysts have been researching and investing in the share market for over 25-30 years each - we don't hire green horns!) are looking under the bonnet of every small cap we cover. We are investingating:

1. Cash is King

  • How much is cash/debt compared to last year?
  • Changes to working capital?
  • Net investment expenditure?
  • What is the company doing with its excess cash?

The first question is whether the ASX stock has more, or less, cash or net debt than the previous year and half year. While this is a simple question to answer, the reasons behind changes in the cash position can be extremely complicated. We will not go into all of the factors here, but emphasise that we will be expecting cash from operations to be approximately in line with profit before tax and interest (EBIT). You may need to think about changes in working capital (inventories, debtors and creditors), as well as in net investment in PP&E (Property Plant and Equipment). Where there is debt, what are its terms, when does it need to be renewed? If free cash flow is not going towards debt reduction, something will have to give. Whether a request for more funds from shareholders is done on good terms or bad will largely depend on the reason given for those funds, which in turn relies on underlying fundamentals – the interaction between the profit and loss; the cash flow statement and the balance sheet.

2. Sales Growth

  • Is the company growing sales?
  • Why are those sales growing – volume or price rises?
  • If it isn’t, what is driving earnings growth?

In most cases we are expecting sales growth from our companies, both the small caps and the blue chip shares we cover. If your company is in transition or restructuring; if it cannot grow sales; then bottom line progress will be much harder to achieve, and your patience as an investor will be tested. If you don’t like the prospect of hanging in there, reduce your position. If your ASX company does report revenue growth, the key is whether you can identify and approximately quantify the factors behind the sales growth. In a service business, this may be achieved through more efficient operation, or by an increase in staff or infrastructure. In a manufacturing business revenue increases should be achieved from either increased volumes or higher selling prices. Management’s commentary on the sources of growth should be clear and unambiguous.

3. Margins Matter

  • How have costs changed over the period?
  • What are the company’s input costs?
  • What is the proportion of fixed costs to overall costs?

The factors behind sales growth, and the cost structures associated with achieving sales outcomes should be reflected in both gross profit margins and net profit margins. Gross margins should expand when prices are rising faster than the input costs that go into creating the products and services.

Underpinning this is our eternal search for operating leverage, as a company’s sales and margins should be growing, and the fixed operating costs of the infrastructure and corporate assets necessary to deliver the outcomes should reduce as a proportion of sales over time, increasing net margins. So margins matter, and again the goal should be to understand what are the factors behind changes in margins and whether these are likely to be sustained or increased.

4. Be wary of what’s “Underlying”

  • What are the headline profits versus the so-called underlying?
  • What has the company declared to be exceptional or one off in prior periods versus the current period?

Some red flags are hidden in the exceptional items, which the company considers not part of its normal operations, or one-off in nature. Examples include gains and losses on asset sales, restructuring costs, as well as write-offs of intangible items when a board has reviewed the cash flows from those assets and decided that they are insufficient to support the assets’ carrying values in the accounts.

Companies exclude these items to come up with their “underlying earnings”, which is meant to reflect the performance of their ongoing operations. This is an issue when these one offs recur from one result to the next. Outside of us ignoring management’s definition, this becomes an issue of its credibility.

5. Outlook Comments

  • What is the tone of the outlook comments?
  • Is the company looking to make acquisitions?
  • Does the company have a track record of underestimating or overestimating future profit growth?

Management’s outlook is important not only for the specific numbers that the company is expecting to deliver or report, but also the tone and information about investment plans and strategic direction which the outlook should deliver. If a company uses language which suggests that it is thinking of making acquisitions to increase its market strength, do not be surprised if a future equity issue is required to help fulfil that intention.

In most cases, management’s outlook will be as positive as legally possible, but as a private investor you can be as suspicious as you feel is appropriate. It is very easy to fall in love with a company, perhaps because it has performed so well and delivered all of its promise and more, and has made you lots of money already. Or it seems so cheap that you cannot understand why you are the only buyer in the market, but the stock keeps going down. Company reports need to be read with a healthy dose of scepticism. The annual report should also be read. This can be somewhat tedious, but as an audited document, this is an important constraint on management’s ability to delude itself and investors.

6. ASX Share price reactions

  • Has the share price been trending up or down prior to the announcement?
  • Was there a sharp reaction on the day of the announcement?

Subscribers of our Australian Stock Reports are sometimes surprised by the reaction of share prices to market moving news like results and prospects. This is a variation of the old adage to buy the rumour and sell the news. The ASX Share market is always looking for growth, and accelerating growth at that. Decelerating growth will often cause a big problem for small cap growth stocks, because valuations are based on higher growth for longer. The bottom line is to avoid owning too many stocks that are so expensive that they are vulnerable to any disappointment of other investors’ expectations.

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