Introducing the Uncapped 100

Today we publish Brendon Lau’s Uncapped 100, ‘the universe’ of small cap stocks Brendon will concentrate on each week. It’s a selection of just 100 stocks from the 2,000 stocks listed on the ASX.

Summary: Eureka Report has further broadened its offering to subscribers with the launch of the Uncapped 100, a refined list of 100 small cap stocks that meet a range of key selection criteria. You can follow the performance of the 100 stocks every Wednesday in Eureka Report.
Key take-out: Companies in the Uncapped 100 include those that have solid business and growth prospects, and some of which have recorded a robust increase in share price over the past 12-months. The Uncapped 100 will be published weekly.
Key beneficiaries: General investors. Category: Shares.

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.

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

NameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
McMillan Shakespeare One of the best performers since the GFC, but doesn't get much press or analyst coverage. Good management team.1,25356.2Industrials
NIB HoldingsOnly listed health insurer. Widely held. Good performer.99752.9Financials
Breville Group Well covered but good candidate for core holding due to good track record.99086.4Consumer Discretionary
M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.96066.8Telecommunication Services
ARB Corp Well covered but good candidate for core holding due to quality management.92150.4Consumer Discretionary
Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.78719.6Industrials
Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding67247.4Consumer Discretionary
Acrux One of the most successful Australian biotechs in recent history. Widely held by institutional investors.625-11.3Health Care
G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.621154.1Consumer Discretionary
Sirtex Medical A shining star in the biotech space and one of the best performing stocks in 2012. Great product (liver cancer treatment) and bright outlook.61385.5Health Care
Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.60863.0Financials
STW Communications Group One of few companies able to benefit from online shift. Widely held and good instutional investor support.59667.3Consumer Discretionary
Beadell Resources Will be a very big FY14 for miner as it has to prove it aims to produce 200,000 ounces of gold a year.56417.6Materials
Retail Food Group Owns a number of well know franchise brands. Widely followed by institutional investors.50852.8Consumer Discretionary
Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.47791.6Consumer Discretionary
Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.44641.4Industrials
Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.44469.5Industrials
Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.43441.7Energy
NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.41628.9Telecommunication Services
Buru Energy Substantial size but not often covered by press. Widely held with good insto support.414-56.4Energy
Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.41270.2Consumer Staples
Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.412-33.0Information Technology
Amcom Telecommunications Well covered junior telco but good candidate for core holding.40055.9Telecommunication Services
MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.39657.6Financials
Forge Group One of the better performers in its industry. Good track record and potential core holding.388-5.8Industrials
Unilife CorpThe developer of one-use prefilled syringes is close to an inflection point as the market is expecting the company to announce a major contract with a pharmaceutical giant in the coming weeks.3804.5Health Care
Cedar Woods Properties Property developer with good ROE and earnings growth track record.37753.3Financials
Sundance Energy Australia Analysts have a favorable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.37459.0Energy
Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by institutional investors.32956.1Consumer Discretionary
NRW HoldingsOne of the better regarded mining & civil contractors with good track record in delivering on projects.318-62.8Industrials
UXC Company has turned corner and enjoyed re-rating. What's next?30791.7Information Technology
Reckon Fierce competition for cloud base accounting software puts it in firing line.30418.5Information Technology
RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?28936.2Industrials
Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.26574.6Financials
Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 24950.4Financials
IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.24949.9Financials
Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.248-17.5Consumer Staples
Mayne Pharma Group Sizeable generic drug maker with interesting board members.24255.7Health Care
Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.241-46.4Health Care
Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.22919.1Financials
MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.220111.4Industrials
Wide Bay Australia The building society is trying to turn its fortunes around. Also worth watching for its exposure to Queensland housing market, particularly around major resource projects.2179.7Financials
Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.210-4.8Consumer Staples
NewsatPotential large cap if it can launch its own satellite in 2015.205-43.2Telecommunication Services
Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.202133.1Industrials
DWS Will be a big beneficiary if governments start spending on IT again.20116.1Information Technology
Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.184144.5Consumer Staples
Data#3 Well respected IT company that receives little press coverage18327.2Information Technology
Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.18336.2Information Technology
Imdex Drilling company is well supported by institutional investors and should benefit from any rebound in exploration activity.182-57.1Materials
Galaxy Resources Good upside potential if it can get its problem-prone Jiangsu plant back on track. Won't be easy to right this ship.181-62.9Materials
Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?17986.1Consumer Discretionary
Collection House In similar space as Credit Corp. Strong stock performance has attracted a following and the stock appears to be well placed to run further17592.8Industrials
Greencross Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.175119.0Health Care
Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered17017.0Telecommunication Services
McPherson's The personal care and household products supplier is relatively insulated from volatile discretionary spend and online threat.16712.8Consumer Discretionary
Collins Foods One of the few food franchise listed companies.15972.4Consumer Discretionary
GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain approval to use its intestinal shealth on diabetics.157-38.9Health Care
Bionomics One of the larger cancer treatment developers in this market.1566.2Health Care
Tiger Resources Future lies in its Kipoi copper mine expansion in the Congo but miner is fully funded with DRC govt holding 40% stake in tenement. Next 12mths will be interesting.155-22.0Materials
Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.150157.9Information Technology
Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.14810.2Information Technology
RCG Corp The footwear retailer is one of the best performing consumer stocks as online competition is not a big threat. Company has a good yield as well.14170.3Consumer Discretionary
Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.13814.6Industrials
Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.1376.1Health Care
Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following.133-25.7Health Care
iProperty Group Worth watching as it is trying to rival REA Group by replicating US online property company Zillow's features.130-35.6Information Technology
TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.129-8.9Materials
Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.12012.2Health Care
Alchemia /AustraliaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.117-18.2Health Care
Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.10070.3Health Care
AMA Group Good turnaround story but under the automotive services group is radar of most.98117.9Consumer Discretionary
BigAir Group The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.9554.0Telecommunication Services
Altona Mining Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.93-28.6Materials
Eservglobal Mobile money transfer company that has been gaining traction. Widely held by institutional investors but low press coverage9063.6Information Technology
Saracen Mineral Holdings Emerging gold producer that is widely held by institutional investors. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.89-72.2Materials
LogiCamms Strong price performance and reasonable valuation attracting interest.8923.9Industrials
Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.86-30.2Energy
Peninsula Energy Widely held by institutional investors and large free float. It's the only uranium miner on the list.86-17.1Materials
Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 7917.7Materials
Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year7614.3Health Care
Doray Minerals Widely held by institutional investors. One of the more favored gold explorers by brokers.76-33.2Materials
Nearmap A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.74411.1Information Technology
RungePincockMinarco IT company to resource industry. Turnaround potential under new CEO.7233.6Industrials
Jumbo Interactive Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.6420.0Consumer Discretionary
Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.586.7Consumer Staples
Colorpak The small cap packaging company has grown via acquisitions over past few years.5819.3Materials
Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.57-11.8Information Technology
Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by institutional investors and is very liquid.54-50.0Industrials
Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.53-40.0Materials
YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.52-37.5Materials
WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.52-23.9Industrials
Korvest The construction products and services supplier has been hit by project delays and deferrals. But its relatively high yield could give it some support.4729.6Industrials
ThinkSmart Potential turnaround story worth keeping eye on.4540.0Financials
Onthehouse Holdings Alternative small cap to online property leader REA Group.34-4.9Consumer Discretionary
ISS Group Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer since it was included in the Uncapped 100.3040.0Information Technology
NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.30107.4Information Technology
eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.21130.0Consumer Discretionary
Mobilarm Unique product that could change global maritime safety practices with its man-overboard location beacon.1310.0Information Technology
Paragon Care Emerging hospital equipment supplier that has been ignored by market.1134.1Health Care