Small-Caps Ready To Take On The World

Published in Investing on 9 May 2012

These smaller companies offer global growth potential.

'Tis the season for league tables, and investors needn't be left out. 

Forbes recently released its Global 2000 for 2012, a list of the 2,000 largest public companies in the world. The list is full of names everyone knows -- from Royal Dutch Shell (LSE: RDSB) (the fourth largest company in the world) and BP (LSE: BP) (number 11) to Tesco (LSE: TSCO) (117) and Diageo (LSE: DGE) (254)

But that wasn't the part that interested me.

Beneath the headlines

As an investor, I'm more interested in some of the less obvious information a list such as this provides. According to Forbes, the combined revenue from the 2,000 companies on the list equalled $36 trillion -- more than the combined GDPs of the EU and US -- while profits equalled $2.64 trillion for a profit margin of 7.3%.

At the same time, the combined market cap for the Global 2000 was $37 trillion, indicating a price to earnings (P/E) ratio of 14 for an index of the 2,000 largest companies in the world.

Local flavour

However, if we look only at the 89 companies on the list that call the UK home, the profit margin rises to 8.4% while the P/E falls to 12.6. This would seem to indicate that British companies are more attractively priced than their global peers. Of course, separating a few trees from the wood, we see quite an array of stories.

British American Tobacco (LSE: BATS) -- the 175th company on the list -- trades on a P/E of 20, which appears to me to be a bit exaggerated given the relative growth prospects of tobacco companies.

However, I can't argue with investors attracted by the healthy and well-covered 4% dividend yield. It is also reassuring, if a bit confusing, that almost none of the company's sales come from either Britain or America, and are instead driven by the growing consumer classes of Asia and Africa.

On the other hand, you have AstraZeneca (LSE: AZN) -- coming in at number 142 -- carrying a P/E of 6 and a yield of 6.1%. The market fears the pharma group's development pipeline has run dry and wonders if the company will be able to replenish its crop of blockbuster treatments as they lose their patent protections.

When tomorrow comes

Now I recognise there could be opportunities worth investigating among Britain's big names -- I mean, many blue-chip shares can be relatively safe, stable places for conservative investors to put their money. 

Certainly dividend expert Neil Woodford has reaped the rewards from backing large-caps, and this free report -- "8 Shares Held By Britain's Super Investor" -- tells me he owns many names on the Global 2000 list.

That said -- and with due respect to Mr Woodford -- I'm more interested in growth! I want to find the companies that will be at the top of this list in five or ten years!

For example, Volkswagen has climbed from 129th position in 2007 to 17 this year, thanks mainly to more than doubling its sales to South America and the Asia-Pacific region. 

Then you have companies such as Burberry (LSE: BRBY), that leapt onto the list for the first time thanks to a growing network of retail outlets and strong demand in China.

In my view, it is the companies that haven't yet been promoted to the Forbes Global 2000 that will provide investors with the biggest returns over the next decade.

The ones I'm watching

I've pinpointed two companies that I think have the potential to make a run at the big boys.

The first is Ted Baker (LSE: TED), a small fashion house that is in the early stages of global expansion. Its floor space in the US increased by 24% last year and 34% in other markets outside the UK, but Ted's domestic market still represents nearly 80% of total sales.

The current expansion push trimmed margins and cash flow in 2011, but if the style catches on in the States and elsewhere, we could see Ted giving Burberry a run for its plaid-clad shoppers. A recent jump in the share price has made Ted a bit pricey at the moment, but this is definitely a business to watch.

The next company is set to ride the interconnectivity wave -- or as it is more commonly known: the iPad wave. Anite (LSE: AIE) tests phones and phone networks to make sure everything works to plan. 

As we (slowly) move towards 4G mobile networks (with the speed and capacity to support widespread use of mobile broadband), phone designers want to ensure their new models work, so they hire Anite's labs to run the phone through the works.

Network providers also use Anite's tools to make sure their towers communicate well with each other. As carriers upgrade their networks with 4G equipment, they should be able to improve efficiency and reduce cost.

Anite may look expensive at first glance, but the potential growth in demand for its technologies in the coming years makes its high multiple easier to justify and could land it in the Global 2000 a few years from now.

Eyes forward

For many football fans at this time of year, the focus necessarily shifts to the promise of the next season, but investors should always be thinking ahead -- especially many years down the road. 

How can we invest in the next big thing? Which companies will be making their mark on the world in five years? I've given you two companies I reckon people will be talking about in the years to come, but there are plenty more out there.

And I shall do my very best to bring them to your attention on The Motley Fool.

Nate Weisshaar is an analyst at Motley Fool Share Advisor, our premium share-tipping service that provides two top investments each month. Try it out today with our 30-day free trial.

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Nate does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.

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blackwhite 09 May 2012 , 9:18am

Could we have some financial analysis of TED and ANITE please?

Dozey1 09 May 2012 , 2:05pm

I'm watching CARCLO, its conductive inkjet technology as applied to touchscreens has been adopted by Atmel one of the world's leading suppliers. At the moment it's being tested by end users, but it's relative cheapness, sensitivity and pliability steals a march on competitors. There are other arrows in CARCLO's bow too.
By the way TED and ANITE both have plenty of competition.

vintractor 09 May 2012 , 2:51pm

Intruiged to see TED on this list - have been a fan for quite a few years - they refuse to spend on advertising - it gives them a bit of a cult following. They are a mid250 company - so not that small - but was surprised last year when I sold some of my holding (a mistake) and found the spread quite large and the normal max trading quite small. But yes - I can see them doing well in china and USA where they have only just scratched the surface.
I also admire his strategy - selling through his own shops - through concessions and simply by getting some of his products,like inexpensive men toiletries sold in Boots!
A clever way to get the name and brand known.

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