Why a dog can be an investor's best friend

Three of the ugliest small dogs are racing to recovery.

Those wanting proof that the market has a tendency to chase its own tail need only look at the best and worst performing stocks in the financial year that just past.

Some of the most spectacular small cap performers on the Uncapped 100 in 2012-13 were the biggest dogs in the year before, while some of the worst performers in the last financial years were fallen stars from 2011-12.

Does this mean we can use the “Dogs of the Dow” theory to pick this year’s winners? The theory is a long established belief by some investors that the biggest laggards on the Dow Jones Industrial Average in any given year would rebound to take pole position in the next 12-months.

Business aerial mapping solutions provider, Nearmap (NEA), is a case in point. It tops the leader board for the Uncapped 100 with a stunning 531% surge in 2012-13. Not many would remember that Nearmap had to suffer the indignity of being the eleventh worst performer in the previous year with its 40% plunge from grace.

The second runner up, Select Harvests (SHV), has recorded a total return of 166%, but shareholders had to put up with a 27% loss in the previous year, making the almond grower the nineteenth worst performer on the Uncapped 100.

Other stocks that have redeemed themselves include footwear retailer RCG Corporation (RCG), dairy products company Bega Cheese (BGA) and gaming systems supplier eBet (EBT) (see The small cap with the biggest earnings upgrade). Both stocks made it to the top 20 rankings.

If you had bought the 20 poorest performing stocks on the Uncapped 100 on July 1, 2012, you would have made an average of 46% for the year compared with a 14.5% gain on the ASX All Ordinaries Index.

Using the same strategy for 2010-11 would have netted you a modest 3% loss, but that stands out well to the more than 11% drop for the All Ords.

But don’t get too excited as blindly buying the ugliest dogs may not be the best strategy. The variation in the returns of the worst 20 is big with roughly half of the stocks generating a loss.

While it is uncommon to find a stock on the worst 20 list for more than one year, some actually have difficulty climbing out of a rut. Crane hire company Boom Logistics (BOL) takes the wooden spoon in this respect. It is the only Uncapped 100 stock that has stayed on the list for three years running.

The other thing is, if you instead targeted the 20 best performers for both years, you would have collected 47% and 9%, respectively.

This doesn’t mean you should not be bargain hunting at the bottom of the Uncapped 100 barrel though. I think the right strategy for those with a stomach for risk is to exercise discretion by understanding the stock’s potential path to recovery over the next 12-months.

Silex Systems (SLX)

One stock on the worst 20 list that I think is well positioned to outperform this financial year is laser technology company Silex Systems.

Silex already seems to be finding its feet after it bounced 7% in the past three days. The stock took a 31% bath in the 2012-13 financial year, which makes number eight on the walk of shame.

The more than 20% collapse in the uranium price to around $US40 a pound and the negative sentiment surrounding nuclear power are some of the reasons why the stock has been out of favour, and the volatility in the solar power industry is also not helping matters.

Silex’s laser is being applied to uranium enrichment and photovoltaics (PV) power generation.

However, as I wrote in late February, there is nothing wrong with Silex itself, and there’s a string of important milestones for the company in next 12-months.

This includes final approval from GLE to proceed with the construction of the first commercial uranium enrichment plant in the US (GLE has exclusive rights to use Silex’s laser for uranium enrichment) and the completion of its one megawatt demonstration PV plant in Saudi Arabia.

Newsat (NWT)

The emerging satellite company is the eleventh worst stock in the last financial year after it tumbled 35%.

However, the share price weakness is related to its large capital raisings to fund its ambition to be the first Australian company to launch a satellite into orbit (see Robert Gottliebsen’s article).

Newsat has so-far achieved every milestone to achieve this end and the probability of success has grown considerably after it managed to lock in debt funding from the US and French export banks.

The launch of the satellite is planned for the end of the 2014 calendar year, but I believe investors will warm to the stock in the months before the big launch date.

Tiger Resources (TGS)

It’s hard to back any mining stock at the moment, particularly those in small cap land.

But as I mentioned in this week’s article (Mining for ROE revival), I believe attitudes towards the industry will change in the coming months.

Emerging copper producer Tiger Resources (TGS) is well placed for any turnaround as the ramp up of its flagship project in the Democratic Republic of Congo continues to exceed expectations.

The miner said today that monthly copper in concentrate production at Kipoi jumped 10% to a record 4422 tonnes in June, taking its year to date production to 20,604 tonnes. This is 11.4% ahead of management’s guidance.

Tiger Resources is aiming to be one of the lowest cost copper producers with an all in cost of around $US1.50 a pound for the life of its mine. The copper price is currently hovering comfortably above $US3 a pound.

The stock has lost 37% of its value in 2012-13, which gives it the dubious honour of taking the tenth spot among the underachievers.

Brendon Lau owns shares in Newsat and Tiger Resources.

Uncapped 100

Small cap stocks covered by the Uncapped team
CodeNameRationaleMarket cap ($m)Total return 1-year (%)Sector (GICS)
SGN STW Communications Group One of few companies able to benefit from online shift. Widely held and good insto support.62076.97Consumer Discretionary
RIC Ridley Corp High corporate interest in the sector and the shrinking pool of agri listed stocks make Ridley worth following.231-16.74Consumer Staples
SHV Select Harvests Noteworthy for turbulent past and exposure to soft commodity market.199163.4Consumer Staples
TAN  Tandou The only direct equity exposure to cotton prices. Also trades water rights and receives little press.5910.71Consumer Staples
REX Regional Express Holdings Well run airline that is overshadowed by Virgin and Qantas.13916.23Industrials
AMM Amcom Telecommunications Well covered junior telco but good candidate for core holding.48190.91Telecommunication Services
NXT NEXTDC The cloud computing company is an IT sector darling. Fairly widely held and followed.46440.48Telecommunication Services
VOC Vocus Communications Telecom stocks are in favour but Vocus is one of the least covered1669.57Telecommunication Services
CAA Capral An aluminium manufacturer that is actually holding up relatively well given that manufacturing is on the nose. 7128.57Materials
SFH Specialty Fashion Group In early stages of turnaround. Can the women's apparel retailer sustain the momentum?15359.05Consumer Discretionary
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.13676.62Consumer Discretionary
ESV Eservglobal Mobile money transfer company that has been gaining traction. Widely held by instos but low press coverage9897.5Information Technology
HSN Hansen Technologies Operates in a high potential/growth industry but is not covered by press or brokers.1477.17Information Technology
IFM Infomedia Interesting tech play in the car parts market. Strong share price gain but gets little air play.153169.51Information Technology
ISS ISS Group Good turnaround story from 2012 but the resource industry software developer under the radar of most. ISS has received a takeover offer after its inclusion in the Uncapped 100.4487.18Information Technology
RKN Reckon Fierce competition for cloud base accounting software puts it in firing line.32421.32Information Technology
AMA AMA Group Good turnaround story but under the automotive services group is radar of most.94118.05Consumer Discretionary
ARP ARB Corp Well covered but good candidate for core holding due to quality management.86334.91Consumer Discretionary
ACL AlchemiaOne of the few biotechs with revenue stream. Good pipeline of oncology treatments.102-30Health Care
BNO Bionomics One of the larger cancer treatment developers in this market.15222.03Health Care
CUV Clinuvel Pharmaceuticals Interesting skin disorder treatment developer that has done reasonably well over past year709.91Health Care
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.67196.4Health Care
EBT eBet Potential alternative to star performer Ainsworth Tech. Has exclusive deal with US poker machine maker WMS.21104.55Consumer Discretionary
LGD Legend Corp Electronic parts supplier to utilities and other industries. Stable earnings with good yield. Often overlooked.48-26.59Information Technology
NTC NetComm Wireless Under appreciated small IT hardware maker that is punching above its weight. Hardly covered by press.3096Information Technology
TGA Thorn Group One of few retail stocks that is performing well. The Radio Rentals chain owner is also well supported by instos.31346.61Consumer Discretionary
FGE Forge Group One of the better performers in its industry. Good track record and potential core holding.3834.34Industrials
LCM LogiCamms Strong price performance and reasonable valuation attracting interest.9227.23Industrials
RCR RCR Tomlinson Good first half FY13 result and outlook, but will its fortunes change this year with the mining capex slowdown?29328.43Industrials
NEA Nearmap A stellar performer with an Interesting business that offers high quality ariel maps to companies & government.90566.67Information Technology
WDS WDS Widely held with strong insto support. Engineering contractor diversified across mining, energy and infrastructure.51-14.99Industrials
NWH NRW Holdings One of the better regarded mining & civil contractors with good track record in delivering on projects.248-68.8Industrials
TSM ThinkSmart Potential turnaround story worth keeping eye on.4314.89Financials
BRG Breville Group Well covered but good candidate for core holding due to good track record.91263.32Consumer Discretionary
AOH Altona Mining Noteworthy copper play with Xstrata pullout of Roseby project in Australia and the good ramp up of its Finnish project.74-50Materials
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.177#N/A N/AMaterials
IMD Imdex Drilling company is well supported by instos and should benefit from any rebound in exploration activity.131-63.24Materials
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.128-33.33Materials
YTC YTC Resources Next 12-mths will be eventful after YTC secured funding for its projects from Glencore.38-46.3Materials
AJA Astro Japan Property GroupStrong leverage to Japanese economy makes this an interesting stock to watch.21316.03Materials
CCP Credit Corp Group Strong price run attracted good investor interest. Leveraged to any rise in loan defaults. Not well covered by press.42766.62Industrials
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 further195122.13Industrials
GEM G8 Education Only listed childcare operator. Acquisition strategy paying off with stock delivering solid gains.657165.26Consumer Discretionary
MBO Mobilarm Unique product that could change global maritime safety practices with its man-overboard location beacon.1850Information Technology
TOX Tox Free Solutions Widely held stock in the waste solutions business. Its unique because it operates in a defensive-growth niche.46240Industrials
TFC TFS Corp The sandalwood products company offers exposure to both the agri and cosmetics industry. It will start commercial harvest this year.1404.17Materials
DRM Doray Minerals Widely held by instos. One of the more favored gold explorers by brokers.67-44.41Materials
PEN Peninsula Energy Widely held by instos and large free float. It's the only uranium miner on the list.68-34.29Materials
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.439-10.8Materials
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.74-77.48Materials
UML Unity Mining Growing Tassie gold producer with high free float. Valuation looks compelling too.51-41.6Materials
PGC Paragon Care Emerging hospital equipment supplier that has been ignored by market.1469.23Health Care
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.160-31.03Health Care
UBI Universal Biosensors IncWell regarded biotech and one of few that's successfully manufacturing in Australia. Struck deal with a few global medical companies.13125Health Care
GXL Greencross Acquisitive vetinary group. Good profit growth and share price performance, but gets little press.190134.45Health Care
CLV Clover Corp One of the star performers in 2012. Operates in growing but relatively stable niche.9964.42Health Care
NAN Nanosonics A successful medical tech story. Should be close to turning in maiden profit with its disinfection device.18639.22Health 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.109-17.94Consumer Discretionary
MMS McMillan Shakespeare One of the best performers since the GFC, but doesn't get much press or analyst coverage. Good management team.1,23445.21Industrials
MXI MaxiTRANS Industries Transport equipment maker posted good interim result. Has appealing yield and growth.19077.74Industrials
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.5135.36Industrials
AUB Austbrokers Holdings The insurance broker is a strong performer. Widely held and well liked by small cap investors.63161.95Financials
MTU M2 Telecommunications Group Amazing growth story and well run company. High free float and strong insto support.1,03881.38Telecommunication Services
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.7669.07Consumer Discretionary
OTH Onthehouse Holdings Alternative small cap to online property leader REA Group. It is trying to use more timely housing data as a compeitive edge against REA.3911.44Consumer Discretionary
IPP iProperty Group Worth watching as it is trying to be the REA Group of Asia.129-16.47Information Technology
MLB Melbourne IT A perennial underperformer could be interesting turnaround story as management is in midst of restructuring the business.18140.33Information Technology
DTL Data#3 Well respected IT company that receives little press coverage.1633.87Information Technology
DWS DWS Will be a big beneficiary if governments start spending on IT again.1979.57Information Technology
UXC UXC Company has turned corner and enjoyed re-rating. What's next?31792.15Information Technology
AAD Ardent Leisure GroupWidely held stock. Earnings more defensive than anticipated. Good yield. Potential core holding.70050.07Consumer Discretionary
NHF NIB Holdings Only listed health insurer. Widely held. Good performer.93951.35Financials
MRM Mermaid Marine Australia Its strategically located facility on WA coast gives it a key advantage over competition in servicing Gorgon & Pluto projects.82631.55Industrials
AZZ Antares Energy Liquid with good insto support. Already in production with exploration upside in Texas.1082.41Energy
BRU Buru Energy Substantial size but not often covered by press. Widely held with good insto support.329-63.3Energy
HZN Horizon Oil One of better regarded small energy stocks that doesn't receive much media attention.38318.42Energy
NWT Newsat Potential large cap if it can launch its own satellite in 2015.210-32.17Telecommunication Services
SEA 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.39949.14Energy
BGA Bega Cheese Corporate interest in Australian food companies makes the cheese maker worth following.38569.16Consumer Staples
PFL Patties Foods Illiquid stock but has suite of well recognised consumer brands. Defensive yield.181-14.19Consumer Staples
CKL Colorpak The small cap packaging company has grown via acquisitions over past few years.5731.18Materials
ACR Acrux One of the most successful Australian biotechs in recent history. Widely held by instos.579-15.45Health Care
MYX Mayne Pharma Group Sizeable generic drug maker with interesting board members.25154.63Health Care
POH Phosphagenics Sizable biotech with a game changing FY14 year ahead. Good insto following but accounting irregularities is a cloud hanging over stock.112-26.67Health Care
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.3426.84Health Care
SPL Starpharma Holdings Noteworthy for its good pipeline of innovations. Well run, widely followed.243-38.93Health Care
CWP Cedar Woods Properties Property developer with good ROE and earnings growth track record.38150.86Financials
RUL RungePincockMinarco IT company to resource industry. Turnaround potential under new CEO.6636.77Industrials
CKF Collins Foods One of the few food franchise listed companies.15259.33Consumer Discretionary
RFG Retail Food Group Owns a number of well know franchise brands. Widely followed by instos.52864.8Consumer Discretionary
SLX Silex Systems Its uranium enrichment technology could become one of Australia's best innovations given its potential to change the nuclear power industry.403-30.5Information Technology
IMF IMF Australia Litigation funder is unique stock. Stock not liquid but its outlook appears promising given the number of potential class action lawsuits.22933.92Financials
AEU Australian Education TrustWell performing childcare centre property owner. Good yield story and outlook. 25757.44Financials
CCV Cash Converters International Strong performance is attracting investors. It's Australia's only listed pawn shop and pay day lender.49883.58Consumer 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.27884.83Financials
MYS MyState Well regarded and could make good alternative to bank stocks. Has good yield and earnings growth over past few years.37752.25Financials
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.191-5.41Financials
BOL Boom Logistics Crane hire group is riding out the downturn in construction.  It's widely held by instos and is very liquid.55-45.35Industrials
SIV Silver Chef Strong jump in the share price of the equipment financing group has attracted a good following.221139.62Industrials
BGL BigAir Group The wireless microcap has gained strong following over past year or two but is often overlooked by investors and the press.9754.68Telecommunication Services
Source:Eureka Report, Bloomberg

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