This is the question most prospective investors of our managed funds and anyone interested in small cap investing ask us. Identifying investment ideas, whether it is ASX listed companies or global companies can come about many ways. It could be we stumble upon them by trawling through all the companies on an exchange or through screening or even observing the holdings of other like-minded small cap value funds.

Company Screens

Our first port of call is to search for investment ideas using company screens. This is usually through Bloomberg or Capital IQ financial platforms. These platforms allow us to identify a shortlist of companies by setting limits around market capitalisation, countries, industry sectors, profitability metrics such as return on equity, valuation metrics such as price-to-earnings ratios and financial health metrics such as gearings ratios.

Some of our standard screens for our domestic managed funds include ‘ASX High Yield’ which is looking for high dividend yielding small cap companies and ‘ASX Value Microcap’ which looks for cheap growth stocks. We also have individual screens for specific industries or specific geographies.

Screens are useful in that they help you come up with a focused shortlist of investment ideas for deeper research. The biggest downside I feel is that often the best investment ideas don’t screen well. There are certain nuances with companies that don’t screen well which makes them a highly prospective investment.

If you are a wholesale or sophisticated investor looking for longer term capital growth then fill out the form on the right to request an Infopack

Trawling through the entire stock exchange

A great exercise I recommend to all investors is to trawl through the entire company list of a stock exchange. This overcomes some of the shortcomings of using a screening tool. From a list of all the companies, I remove all those above $500m market cap (as we are focused on microcap and small cap companies) and remove listed investment companies, REITs, energy, mining and biotech companies. From there I have a look at each one’s financials, focusing on the income statement and cash flow statement and a description of what the business actually does. I find this exercise, repeated a couple of times a year, give me a good understanding of a particular market very quickly, even if it only yields a few investment ideas.

Following like-minded fund managers

I also say to our team, that it’s not where the idea comes from that matters; as long as you do your own research and come to your own conclusions. I often trawl through fund manager’s monthly or quarterly letters, investment forums, blogs and websites such as ValueX Vail.

Meeting with company management

Each year we meet  with a couple of hundred of companies whether it is at broker presentations or one on one with the company’s management teams. Most of the time  we are meeting with companies that we are not already invested in, to gain a better idea of how their business works, certain nuances in their business that is beyond the annual report and to understand what changes are happening inside their business and their industry overall. Sometimes we learn about how competitors are performing and this provides another great source of investment ideas.

Finding global companies in the same industries

A couple of our best investment ideas for our Global Microcap Fund, in the online travel sector has come about from our experience and understanding of the online travel players listed in Australia, primarily as a result of our investment in Webjet Ltd (ASX: WEB) and previously in Wotif (ASX: WTF). Our understanding of the market globally in the online travel industry, the value chain in the industry and competitive dynamics allowed us to identify two online travel companies, one in the UK and one in continental Europe.

Everyone has a different way in identifying investment ideas. As long as the process provides a constant stream of ideas for further research, stick with it and always look for ways to improve it.

If you are a wholesale or sophisticated investor looking for longer term capital growth then request an Infopack

Edited by Aman Talwar


For Wholesale Investors Looking For Long Term Capital Growth

✓ Portfolio of ~15 to 40 companies with a 5+ year investment horizon.

✓ Monthly liquidity; no gearing or derivatives (cash & long equities only).

✓ Core competency around microcap & small cap Industrials (products & services).

✓ For wholesale and sophisticated investors only as defined by the Corporations Act 2001.

Microequities Investment Principles

At Microequities, we are first and foremost value investors.Valuation is the most important parameter we seek to understand when investing in a business, as we believe that in an undervalued company lies a superior profit making investment opportunity.  And we not only look for value. Our investment targets should also have credible and strong business models; competitive advantages; financial solidity; market positioning and competent & ethical management. Microcap companies are often undervalued due to a lack of professional investment coverage. They are inefficiently valued by the market, which means there can often be large differences between the intrinsic value and the market value of the company. This means we can buy them at unfair prices. As value investors 100% specialised in this asset class, we are constantly looking for these opportunities. We search; analyse; meet with management; industry insiders and if we like a company, we buy it for the long term. We are long term investors looking for business partnerships.