15 Small Cap Recovery Bargains

Published in Investing on 7 September 2011

A big bunch of value small caps for you to ponder.

There are lots of small cap companies out there whose valuations make little sense.

Some of these have been beaten down by the stock market's summer blues, but the out and out value candidates have certainly fared better than most.

Private investors who like to concentrate on fast-growth exciting small caps will probably have learned, recently, why many Fools dislike paying for such growth. These companies tend to suffer most when the storm clouds gather.

Such is the beauty of limiting the downside with value shares.

So taking net tangible asset value as the starting point in most (though not all…) cases, I've taken a look at 15 small caps, each with a market capitalisation under £50m.

A word of warning

A BIG word of warning here: Most of these companies are AIM-listed small caps with all the risk that implies. Some of the news issued by such companies can, on occasion, leave you agape at its effrontery.  

So it's best both to limit the downside by considering value credentials and other factors such as ownership, and to own a few in the hope that the winners outstrip the losers.

The downside is that you probably won't find explosive growth here.

So without further ado, here are 15 small caps to run your slide rule over:

1. James Latham (LSE: LTHM) -- 243p. The wood importer and distributor's shares have done well this year as I explained in more depth in June.  But they're still on a price-to-earnings ratio (P/E) of less than ten looking back or forwards, with net tangible asset value (NTAV) of just short of the overall valuation. There's also a respectable 3.8% yield. The company is busy reorganising and refurbishing its older sites to replicate its success to date.

2. Inland (LSE: INL) -- 16.5p. Back in May, I thought Inland's shares were excellent value at 19.7p. Either I was wrong, or the shares are even better value now. Since then, the brownfield development specialist has bought another site in Essex. Success in the company's intended planning application for its site near Poole could see an uplift in the company's net asset value (which is already 50% ahead of the valuation) and share price. Inland is currently working with the Local Authority, local residents and councillors to prepare the application. The company's overall strategy was explained to a gathering of Fools in London in May.

3. Camco International (LSE: CAO) -- 14.4p. The carbon credits specialist Camco has suffered badly from the market wobbles. The shares reached 23p in June as the company appeared to be making excellent progress. Camco had NTAV of 27.3p per share including cash of 5.8p per share at the end of the year. It also had 14.7p per share in net accrued income from carbon projects which are expected to deliver cash in the next 2.5 years.

4. Hellenic Carriers (LSE: HCL) -- 53p. This may not be the best time to be in shipping, but the worries may already be more than reflected in the share price which started the year at 80p. The attractive NTAV figure of three times the share price needs to be tempered against depreciation. Also, the brokers anticipate a loss in 2012.  

5. Molins (LSE: MLIN) -- 90p. Stephen Bland recently described Molins as a "full PYAD share" since when the price has lost a further 7%. With NTAV of 182p per share, cash of 31p per share, yield of 5.6% and an anticipated P/E of 6.3, you can see what he means.

6. Haynes Publishing (LSE: HYNS) -- 235p. This fully-listed long-time Foolish favourite has made a change of gear into electronic publishing. Its recent final results show a company on a P/E of 8.1, yielding 6.7% and with NTAV of 263p per share.

I explained in July why I thought shares in:

7. Michelmersh Brick (LSE: MBH) -- 29.5p

8. Argo (LSE: ARGO) -- 15p

9. Belgravium Technologies (LSE: BVM) -- 6.9p, and

10. Titon (LSE: TON) -- 40.5p, looked good value.

Not a lot has changed, though Wednesday's half-year results show Belgravium making excellent progress.

Two weeks later, I also had a look at: 

11. W.H. Ireland (LSE: WHI) -- 67p

12. Robinson (LSE: RBN) -- 86.5p

13. Ensor (LSE: ESR) -- 20.5p, and

14. Airea (LSE: AIEA) -- 12.75p.

Again not much has changed, with the exception of Titon which has is seeing subdued markets for its window ventilation systems. The share price is equally subdued losing a quarter of its value.

15. Pressure Technologies (LSE: PRES) -- 147.5p, is the worst recent performer on this list. But on a "two steps forward, one step back" type of basis, it's perhaps better to buy shares in the high pressure cylinder specialist just after the backward step.  

A prospective P/E of 6.4 and NTAV of £1 a share after an acquisition make the company look a good recovery prospect for my money.

More on small caps:

> David owns shares in James Latham, Inland, Camco, Michelmersh Brick, Pressure Technologies, W.H. Ireland, Robinson, Argo, Belgravium Technologies, Ensor & Airea.


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ANuvver 07 Sep 2011 , 9:50pm

Sorry, "you won't find explosive growth" in these hairy-arsed AIM-listed stocks (scuse paraphrase)?

I have to ask: if that's the case, why bother with the risk in the first place?

To be fair, a few of these are on my list. But looked at HCL a while ago, and I said "no, no, no".

tux222 08 Sep 2011 , 10:27am

Why bother (with smallish AIM stocks)?

Because you're being compensated for risk by an above-average dividend?

Or because the shares are desperately undervalued on a smallish single-digit PE, and the market is likely to revert to the stock's long-term average PE over the next few years?

Or because small companies often have "inefficient" balance sheets with low debt or net cash, and sometimes property assets that haven't been revalued since the 1970s?

Or because of Peter Lynch's recommendation to beware the hot sectors? Many small companies are the one of few players in a small non-growing market sector that no new competitor is likely to try to enter.

Or my favourite answer: that some smallish family-run companies whose directors are significant share-owners are actually lower-risk than some so-called "blue chips" being run be "professional managers" whose incentives are not in the least bit aligned with the long-term interest of the shareholders. RBS was just the worst example.

As always, do your own research. Of the above, LTHM is the only one I hold, and PRES on my watch list.

Oh, and another reason if you are wealthy and retired. Many such companies are favorably treated for IHT ("business asset"), should you die while holding them.

tux222 08 Sep 2011 , 10:32am

Oh, and one more reason. Because with small companies followed by few if any analysts, a private investor can actually gain an edge over the professional investors. Many of those may be prevented from investing by their rule-book, or by the dificulty of trading somewhat illiquid stocks in (to them) any significant quantity.

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