Small caps hide a few diamonds in the rough

The Australian, November 12, 2016: EXTRACT:

As the large-cap stocks whipsaw on the great unanswered question of our time — what does Donald Trump really mean for markets? — the inherently riskier small to mid-sized sector suddenly presents an unlikely safe harbour for yield chasers.

The trick is to find the right mooring points — small cap stocks with sustained earnings and a proven dividend record — in a waterway strewn with shipwrecks which is notoriously hard to navigate.

“There are the funny little opportunities you can find when no one else is looking,’’ DMX Capital Partners’ stock picker Simon Turner says.

On DMX’s analysis, only one-quarter of the 1349 ASX entities with a market cap of up to $250 million are profitable, while only 14 per cent pay dividends.

Below the $100m market cap cut-off the picture is even starker: only 19 per cent are profitable and a mere 10 per cent pay dividends.

Bear in mind that more than half of the stocks are in the resources sector.

Taking the glass-half-full approach, at least there’s one quarter of companies out there paying their way and most receive little coverage.

“In our opinion, companies which are profitable with good visibility around future earnings growth and which have strong balance sheets offer a significant opportunity for long-term out performance,’’ Turner says.

“This is particularly when you invest while broader market awareness of these businesses is low or non-existent.’’

DMX looks for stocks not just with growing earnings and consistent dividends, but with a net cash surplus and trading on an earnings multiple lower than the broader market.

This dramatically reduces the investment universe to less than 100 companies. Here are some of Turner’s selections that make for a safe yield hidey-hole in these turbulent geopolitical times.