Uncapped 100 beats the pack

In its first 100 days, Eureka Report’s Uncapped 100 portfolio has easily outperformed the market.

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Summary: In early June, Eureka Report launched the Uncapped 100, a refined list of 100 small cap stocks. Companies in the Uncapped 100 include those with solid business and growth prospects. After its first 100 days, our small caps portfolio has easily outperformed the broader sharemarket.
Key take-out: The Uncapped 100 has produced a return of 14% since June, compared with a 9% return by the S&P/ASX 200 Index. Our "buy" calls have generated returns of 21% in just over three months. The recent outperformance of small cap stocks over larger companies is likely to continue over the coming months.
Key beneficiaries: General investors. Category: Shares.

The last 100 days has been the most exciting time for small cap investors since the market’s dramatic bounce in 2009 coming out of the global financial crisis.

The turnaround in performance of small stocks should be a wake-up call for “blue-chip only” investors, as the recent outperformance of smalls over large stocks is likely to continue over the coming months.

Our buy calls on stocks in the Uncapped 100 have generated returns of around 21% since we officially kicked off in June. The gains on these emerging stocks are 14% ahead of the top 100 stock index and the S&P/ASX Small Ordinaries.

The Uncapped 100 stocks as a whole have performed very well, producing a return of 14% compared with a 9% return by the S&P/ASX 200 Index.

The next 100 days will be just as exciting for small caps, as many in the sector have only just started to emerge from their most trying periods in history in terms of performance against their larger rivals.

But first let me recap on the last 100 days. To say small cap stocks have been on the nose would be an understatement, with the sector briefly entering bear territory in June. The S&P/ASX Small Ordinaries Index plunged 21.8% after hitting a nine-month high of 2,414.5 in mid-February, and fell to its lowest level since early 2009 on June 25.

A loss of more than 20% is regarded as bear territory, but we are unlikely to see the June low for some years now that we have rebounded around 17% from the bottom.

In spite of the decent recovery, the small caps index is still trailing the S&P/ASX 100 Index by a near record, and this means its recent outperformance against its larger peers has more room to run.

This performance chasm can largely be attributed to the “mining bust scare”, when falling commodity prices spurred investors to run for the exits as the economics for a number of projects were starting to look questionable.

Small miners took the brunt of the sell-down, as they are generally the highest-cost producers of minerals and the ones most in need of additional funding. Mining services contractors also quickly lost favour as their clients scrapped spending on project development.

Many are not out of the woods, but the sell-down was an excellent buying opportunity for select resource juniors that have quality projects and funding locked in, and well-managed engineering contractors with good reputations in delivering on projects.

This was essentially why we recommended subscribers buy the dips for emerging copper producer Tiger Resources (TGS) and engineers WDS (WDS), NRW Holdings (NWH) and LogiCamms (LCM).

Tiger Resources closed at 30 cents on Tuesday and is up 58% since we recommended it as a buy on July 3, while WDS and NRW are 43% and 33% higher at $75 cents and $1.51 respectively since we wrote about the prospects of a mining services rival over a month ago.

LogiCamms is not far behind, with the stock up 25% at $1.75 after we called it a “buy” based on its dividend growth prospects on August 7.

However, what is more pleasing is that the strong performance of our “outperform” recommendations aren’t concentrated on the highly cyclical mining-related sectors. In fact, the best performing stock on the list is gaming systems company eBet (EBT).

The New South Wales company, which provides pokies machines and monitoring and management systems to gaming venues, has seen its share price surge 140% to Tuesday’s close of $2.67 after we highlighted its earnings growth potential three months ago.

Another star performer is medical device developer GI Dynamics (GID), with the stock being one of our five bargains for under a buck back in mid-July. The company is trying to commercialise its intestinal liner to help control the diets of obese people and diabetes sufferers, and I think the stock still has room to run higher over the next six to 12 months, even though it is up 41% since the article was published.

This is also true for the other stocks mentioned above. While some like WDS and LogiCamms may be starting to look fairly valued, they are likely to be well supported on dips, in part due to their relatively generous forecast dividend yields for 2013-14 of 7.9% and 5.8%, respectively.

On the flipside some of our bullish calls have yet to pay off, although their underperformance is quite modest. Horizon Oil (HZN) is the biggest drag, with the stock falling 7% from when we called it a “buy” 10 weeks ago to yesterday’s close of 32.5 cents.

The energy junior surprised us with a capital raising at the end of July, and that is one of the factors capping the stock. More alarmingly, some have taken the $53.5 million new share offer at 33 cents a pop as a warning sign that the deal to sell part of its Papua New Guinea project to Osaka Gas may have hit a snag.

We are keeping our “outperform” rating on Horizon, but this development does materially lift the risk profile of the stock, which is likely to stay range bound until there is greater clarity on this front.

Beadell Resources (BDR) is another that is only suited for those with a stomach for risk. The emerging gold producer has not gained traction since our “buy” call a month ago as the entire gold sector has been knocked around by the volatile spot gold price.

The precious metal is giving investors vertigo, with the market on edge as it tries to second-guess when the US Federal Reserve will start to wind back its $US85 billion a month bond buying program.

This bond splurge has been credited to giving some asset classes like gold a big lift. and any talk about the tapering of the program will be a drag on these assets.

Equipment financing group Thinksmart (TSM) is also carrying the wooden spoon. The stock is down 3% at 34.5 cents since we put it on the buy list. The issue is not the fundamentals of the company but the stock itself.

The stock price is 30 plus cents, and a one cent movement can cause a big change on a percentage basis. The stock is also lightly traded and this means it is prone to drift. On the other hand, these shortcomings could work in favour of those looking to buy the stock as it can present a good entry point.

This brings us to the question of where to from here? The next 100 days is still looking good for emerging stocks, even though the so-called “Santa Rally” (a seasonal pattern that usually sees the market outperform close to Christmas and into January) tends to favour large caps over small caps.

Barring an unforeseen major economic shock, this year could be different for small caps for a few reasons.

First is the timing of the market bounce. Small caps tend to fall harder in a market correction and lag in the recovery, as investors favour larger stocks due to the perception that they are safer investments.

Small caps have only just started on the current recovery and are likely to outperform large caps in the coming months.

This is particularly so for small miners. The sector giants like Rio Tinto (RIO) and BHP Billiton (BHP) have already been re-rated by the market, and as investors start feeling more confident about the outlook for commodities they will climb the risk curve and buy the smaller miners.

Another reason why small caps will find greater favour is because investors are starting to focus their attention more on stocks with good growth prospects and dividend yields.

The big defensive stocks that have been the favourites of the market are looking fully stretched and offer relatively limited upside at current levels. This is going to force investors to turn to alternatives that offer a good mix of growth and yield, and you are a lot more likely to find these opportunities at the small end of the market than among blue-chips.

This is exactly why professional investors are wading back into small caps, as I wrote on July 31 (see Big boys scramble into small caps).

The last factor that will keep the wind on the backs of small caps is the “honeymoon” period following the federal election earlier this month. As highlighted in the June article (Stand by for a post-election small caps rally), junior stocks have a habit of performing strongly for up to six months following an election.

However, one shouldn’t get carried away. Small caps are still a higher-risk proposition that you need to keep an eye on. The vast majority of them are not suitable as a blind “buy-and-hold” strategy.

This is why most investors should treat small caps as a supplement to a blue-chip portfolio, and not a replacement.

It is also important to keep following the Uncapped 100 on Eureka Report, as we will continually highlight opportunities in this space (the “outperform” recommendation table above is a good place to start) and keep you updated on market-moving events afflicting the 100 stocks on our watch list.

The Uncapped 100 will also be rebalanced every quarter, with new promising emerging stocks replacing those that no longer meet our criteria of inclusion in the list.

The rebalance will happen next week, and I will cover this in detail in the next Uncapped article.

Think big, go smalls!

Uncapped 100 - Australia's most interesting small cap stocks

Small cap stocks covered by the Uncapped team
CodeNameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
BRG Breville Group Well covered but good candidate for core holding due to good track record.1,135,732,05670.66Consumer Discretionary
MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.1,117,402,71088.37Telecommunication Services
NHF NIB Holdings /AustraliaOnly listed health insurer. Widely held. Good performer.935,078,97933.46Financials
ARP ARB Corp Well covered but good candidate for core holding due to quality management.916,163,69630.53Consumer Discretionary
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.880,316,650161.52Consumer Discretionary
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.847,471,31324.26Industrials
MMS McMillan Shakespeare One of the best performers since the GFC, but change to FBT rules is threatening growth.841,375,549-5.2Industrials
SRX 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.774,184,32653.19Health Care
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.751,264,64852.76Consumer Discretionary
BDR 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.673,977,112-9.04Materials
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.646,125,61065.01Consumer Discretionary
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.638,075,50046.64Financials
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.581,143,31161.26Consumer Discretionary
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.546,780,70171.82Consumer Discretionary
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.544,526,0010.87Health Care
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.531,856,75097.87Financials
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.520,675,29332.83Telecommunication Services
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.508,751,25196.57Consumer Staples
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.507,221,710-41.58Energy
SEA Sundance Energy Australia Analysts have a favourable take on the oil & gas explorer, but stock is still under radar of most. Sundance provides exposure to prospective Eagle Ford shale.490,368,68335.9Energy
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?479,497,467125.94Industrials
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.478,109,13162.97Telecommunication Services
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.456,267,731-33.66Information Technology
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.446,556,64156.04Industrials
FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.434,291,84029.06Industrials
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.425,388,76322.59Industrials
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.421,670,4106.27Energy
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.421,120,880-26.86Industrials
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.409,733,97850.32Financials
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.371,883,606114.83Health Care
UXC UXC Company has turned corner and enjoyed re-rating. What's next?367,599,06033.13Information Technology
UNS 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.341,112,51820.62Health Care
TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.339,485,50434.65Consumer Discretionary
MOC Mortgage Choice Has a good track record and is leveraged to any housing recovery. The stock is also liquid with good insto support.339,436,03591.76Financials
GID GI Dynamics IncLargely forgotten by investors but could attract attention this year as it looks to gain US approval to use its intestinal liner on diabetics.329,531,43319.01Health Care
BNO Bionomics One of the larger cancer treatment developers in this market.300,458,55788.28Health Care
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.280,546,6311.03Information Technology
SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.279,705,475-35.41Health Care
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 267,584,71743.65Financials
SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.266,053,009316.91Consumer Staples
RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.258,566,345-18.69Consumer Staples
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.257,590,75998.17Industrials
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.247,851,807114.47Industrials
IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.244,570,60233.22Financials
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.242,166,90139.06Information Technology
NWT Newsat Potential large cap if it can launch its own satellite in 2015.235,243,759-20.37Telecommunication Services
AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.231,208,43531.14Financials
CLH 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 further230,468,36990.44Industrials
GXL Greencross Acquisitive veterinary group. Good profit growth and share price performance, but gets little press.226,713,058114.03Health Care
VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered216,303,23855.77Telecommunication Services
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.215,308,80787.8Materials
TGS 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.202,431,091-13.04Materials
DWS DWS Will be a big beneficiary if governments start spending on IT again.201,191,3912.65Information Technology
NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.201,059,17456.12Health Care
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.192,044,891172.21Information Technology
ACL Alchemia /AustraliaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.187,945,40420.83Health Care
IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.184,164,032-46.2Materials
DTL Data#3 Well respected IT company that receives little press coverage.182,460,31210.45Information Technology
PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.180,785,324-14.64Consumer Staples
WBB 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.179,381,058-21.57Financials
RCG 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.173,737,30591.74Consumer Discretionary
SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?173,012,49787.33Consumer Discretionary
HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.166,659,57629.44Information Technology
CKF Collins Foods One of the few food franchise listed companies.157,170,01359.43Consumer Discretionary
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.143,484,71113.9Information Technology
BGL BigAir Group The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.139,296,06669.56Telecommunication Services
SAR Saracen Mineral Holdings Emerging gold producer that is widely held by instos. Hitting milestones and looks cheap. Key asset is close to gold majors, which makes it a potential takeover target.136,910,538-46.51Materials
UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.131,819,351-5.63Health Care
MCP McPherson's The personal care and household products supplier had been relatively insulated from volatile discretionary spend and online threat, but its latest profit warning shows it's not immune.129,030,121-16.32Consumer Discretionary
AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.128,774,9941Energy
LCM LogiCamms Strong price performance and reasonable valuation attracting interest.124,917,70273.81Industrials
ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage120,787,315169.44Information Technology
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.119,605,56888.1Consumer Discretionary
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.116,694,786-12.4Industrials
NEA Nearmap A stellar performer with an Interesting business that offers high quality aerial maps to companies & government.114,787,865914.29Information Technology
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.108,555,45823.13Industrials
DRM Doray Minerals Widely held by instos. One of the more favoured gold explorers by brokers.95,050,735-29Materials
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 94,099,53327.27Materials
JIN Jumbo Interactive Innovative small cap facing off industry dominated by giants. Worth watching to see if it can carve out a profitable global business.93,202,48486.91Consumer Discretionary
POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following but questions of poor audit and governance standard could dog company.91,841,942-33.33Health Care
RUL RungePincockMinarco IT company to resource industry. Facing tough operating climate with new CEO trying to restructure and turnaround company.84,807,13736.36Industrials
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.82,354,752-47.76Industrials
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.80,113,1290.01Health Care
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.79,931,198-3.57Energy
AOH Altona Mining Noteworthy copper play with Xstrata pull-out of Roseby project in Australia and the good ramp up of its Finnish project.79,827,705-48.28Materials
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.70,240,0826.93Information Technology
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.69,434,44133.87Consumer Staples
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.65,229,72164.37Materials
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.63,260,963-23.81Materials
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year61,720,5161.57Health Care
TSM ThinkSmart Potential turnaround story worth keeping eye on.55,995,94991.67Financials
OTH Onthehouse Holdings Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a competitive edge against REA.55,878,95249.13Consumer Discretionary
GXY 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.51,247,021-84.68Materials
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.50,543,839-46.67Materials
KOV 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.47,159,504-3.84Industrials
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.40,915,207191.37Consumer Discretionary
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.30,244,474113.64Information Technology
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.15,591,06480Health Care
MBO Mobilarm Unique product that could change global maritime safety practices with its man-overboard location beacon.13,694,1529.84Information Technology
ISS ISS Group ISS delisted on Aug 9 after being acquired by  P2ESn.a.n.a.n.a.
Source: Eureka Report, Bloomberg

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The last 100 days has been the most exciting time for small cap investors since the market’s dramatic bounce in 2009 coming out of the global financial crisis.

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