Introducing the Uncapped 100

Ever since I started writing for Eureka Report readers have been asking, ‘what stocks do you follow?’ or ‘how do you identify what to cover when there are 2,000 small caps?

Today I’m going to answer those questions and go one step further. I’m publishing my Uncapped 100 … it’s ‘the universe’ of stocks I intend to concentrate upon at Eureka Report and I will publish every week with my column.

The idea is you and I together can delve into the Uncapped 100 for the best investing ideas … indeed my feature today (Three small caps striking core values) takes three stocks from the list which I believe could be a part of every serious small cap investor’s portfolio.

For a start we’ll produce the Uncapped 100 in a similar fashion to John Abernethy’s weekly publication of his portfolio (click here), and though I will regularly write and feature stocks on the list I only intend to make an official resetting of the list four times a year – the first ‘rebalance’ will be in September.

Take a quick look now at the Uncapped 100 at the bottom of this feature.

Ok, now that you have an idea what’s on the list I want to tell you about how I came to create this list and my criteria for stock selection.

First of all, these stocks are ‘small’ and not actively considered by the herd of stockbroking analysts who spend the vast majority of their time following the ASX 300.

Of the 1,978 listed companies on the ASX, 1,650 of them have modest market capitalisations that are under $800 million.

There are a number of important points readers need to bear in mind when looking at the Uncapped 100.

The vast majority of companies in the index have proven business models, with 70 of them posting a profit in the last financial year, and roughly half of these stocks have grown their earnings per share over the past three years.

Here’s my criteria for inclusion in the Uncapped 100:

1. A market capitalisation of between $50 million and $800 million;
2. A free float (percentage of total shares on issue that can be traded freely on the ASX) of at least 70%;
3. A robust increase in share price over the past 12-months, or the company has strong institutional shareholder support (this can be seen via substantial shareholder notices and company annual reports);
4. A big pipeline of expected news releases that can be in the form of production milestones, corporate activity, etc;
5. Qualities that make the stock an ideal “core” portfolio holding now or in the foreseeable future (see Three small caps striking core values);
6. In the midst of a significant turnaround in company fortunes.

At any given time stocks in the Uncapped 100 will need to meet at least four of the six conditions before they can be considered.

Uncapped 100 members are not picked on valuation grounds; in other words, just because it is in the list does not automatically make it a ‘buy’ because some stocks may have rallied beyond what I consider fair value.

Back testing would suggest the Uncapped 100 has outperformed the S&P/ASX Small Ordinaries Index and the S&P/ASX 200 Index over the past three years.

Over the three years the Uncapped 100 has generated a total return of 49% compared with an 11.5% loss by the Small Ordinaries and a 10% gain by the top 200 benchmark.

Click to enlarge

In designing the Uncapped 100 I have geared it towards investors with a medium-term investment time horizon. As we move forward I intend to highlight short-term trading opportunities, as they occur, but recommendations given to stocks will generally be done on a two- to three-year view.

A lot of work and thought has gone into the selection process, and feedback from our readers is always welcome. You can email me directly at brendon.lau@uncapped.com.au.

The rest of 2013 is going to be an exciting time for small cap stocks as I believe they are poised to outperform large caps in the months ahead.

The Uncapped 100