Active investing may be a better strategy than buy-and-hold for small cap investors these days because cycles are now playing out in weeks rather than years, says a top expert.

Former Vocus (ASX:VOC) boss and small caps expert James Spenceley says a combination of faster media cycles and a bum market is making small cap investing all about being able to pick the right stock.

“The cycle is getting faster,” Mr Spenceley told Stockhead.

“The bitcoin boom was six weeks long. You’re seeing that oscillation get faster and faster because the information is so well-shared online.

“The market has definitely been weird this year and I think it’s probably because the bear case is really good.

The bull run has been going for a long time so when something goes hiccup somewhere, that effect is amplified [by the faster cycle].”

As share prices spike, fall, and then track sideways for months on end, those buying-and-holding are missing out.

Mr Spenceley says active investing is more profitable in this market and “you’d be mad” to buy stocks and ignore them for years.

At the same time, that creates opportunities.

“I’m not suggesting you should buy it,” he said, but pointed to Yowie (ASX:YOW) as a stock trading at a reasonable price compared to the business.

Mr Spenceley made his name as the CEO who gave Vocus investors a 1700 per cent return, then famously quit after a boardroom bust up in 2016.

He started small cap fund MHOR Asset management with Gary Rollo in the same year.

While they still like small caps — about 48 in fact — they’re tending towards the bigger ones now.

“We saw a lot of small caps running out of money. So we’ve gone to the safer end,” he said.

Small cap expert James Spenceley
Small cap expert James Spenceley

“It’s really hard to find good companies in small caps right now. They are no buyers and no one is putting capital into riskier stocks.”

“What we like at the moment are companies that are growing but they’re not growing super fast. They’re not your Altiums, your Wisetechs, your Afterpays… they’re growing at 7 to 15 per cent a year and they’re much better risk reward.”

Get off the themes

The faster cycle and the bodgy market have wrecked the ‘incoming tide lifts all boats’ concept, and investors need to look carefully at the price-to-valuation factor.

Mr Spencely has his eye on a diverse range of companies that may fit the bill.

He reckons litigation funder IMF Bentham (ASX:IMF) and intellectual property firm IPH (ASX:IPH) is a good example.

“It’s a rollup of IP law firms and they control [a majority] of Australian IP lawyers.”

A market darling two years ago, IPH missed a couple of forecasts and the share price dropped and now looks to be good value and is growing.

“Anything with high PE stay away. You get a double whammy of having a very bad market and having these guys missing an earnings number. When these guys miss by 5 percent the stocks can be off by 40 per cent.”

The goodies among the noise

Mr Spenceley still starts his search for companies on a theme basis, however, but uses it as a starting point to find those reasonably priced gems.

US oil shale is one, as distribution problems around pipeline shortages is likely to push up US oil prices, and Sundance Energy (ASX:SEA) is the favourite in that field.

While Mr Spenceley hasn’t looked hard at the water or bioplastics sectors he has picked Integrated Green Energy (ASX:IGE) is one of his “most interesting” stocks, a company which turns plastic waste into fuel, and is a big fan of rubbish collector Bingo (ASX:BIN), which actually recycles the majority of their trash rather than dumping it in landfills.

MOHR has a handful of HR companies and childcare companies it’s invested in or investigating as well.

The former, including XREF (ASX:XF1), LiveHire (ASX:LVH) and Family Zone (ASX:FZO), is looking reasonably priced after a big 2017.

The latter because of the government’s recent childcare changes which Mr Spenceley believes will make it easier for women to go back to work.

But you’ve got to pick your timing: G8 Education (ASX:GEM) is a favourite but “they may downgrade before the year is out” and is one MHOR has been in and out of over the last few years.

Mr Spenceley is now well out of cannabis.

MHOR invested in Cann Group’s (ASX:CAN) IPO but has since sold out, and Mr Spenceley says the sector is too volatile and too uncertain as to which vertical within the sector — growing, drug making, distribution etc — will finally win out.

“It’s great if you’re a Hot Copper junkie and you want to make some money quickly, then that could be your thing,” he said.

“But I reckon there’s a bunch of ppl who invested a lot of money in alcohol just after prohibition and lost lots a lot of money too.”


This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.