Microcaps offer big potential for long-term investors, says expert

Microcaps offer phenomenal potential for long-term investors — but you need to do you research, says Carlos Gil, founder and chief executive of Microequities.

What is the attraction of microcaps compared to blue chips?

It is not always easy to find deep-value opportunities in the top end because there are a lot of companies that are significantly over-priced. You have to be more discerning than ever to see through the pricing dislocation in the market. But when you do there are some really good pockets of value.

The risk appetite of individual investors is very high at the moment because we have had such a long period of depressed interest rates. Holding risk-free assets no longer has a value proposition so, coupled with the compressed commercial and residential property returns, people are looking for returns in other asset classes.

What do you look for in a microcap?

We are value-based investors so we look out for companies we believe have an intrinsic value more than just the market value. The asset class has a lot of constituents but only about 20 per cent are profitable, you need to be able to identify a credible growth path.

There is a diverse number of investment grades between the companies in that space. We look at the business model that underpins that profit and how the market or industry is moving — is there a tail wind or a head wind?

Management teams are also important as they drive investment outcomes. Depth of management teams in the asset class are a lot thinner so management needs to be quality.

What is your advice for everyday investors interested in microcaps?

The bottom line is they need to do a lot of research – you can’t navigate this asset class without undertaking a significant period of information gathering.

There is phenomenal potential for a long-term investor, this is the most dynamic space for long term growth because they will grow at sustained levels in the long term and drive investment returns. There is no use expecting big returns in 12 months. They need to invest with long-term horizons, at least five years.

What tips are on your radar?

SmartPay (ASX:SMP) is a payment technology company with a strong possession in NZ and a small market share in AUS. I think they are flying underneath the radar. Earlier this year they had an unsolicited takeover proposal from a private equity group and I think that approach stems from the fact that it was under-valued.

Lately there have been depressed valuations in the media sector due to popular opinion that the sector is structurally challenged and is likely to face years of declining revenue. But we took a view that the capital markets are underestimating the ability of the sector to adapt and think that pending legislation in the senate will lead to consolidation. I can’t give much away but Prime Media (ASX: PRT) is one of our picks.

You have been working in the microequities space for a long time now, how have you seen the sector change?

The asset class has grown a lot in terms of investor participation – there are a lot of microcap fund managers that exist today and I think it is more genuinely recognised as an asset class. In the same way that small companies in the 80s and 90s gained recognition, I think advisors acknowledging that it is a requisite asset class to deliver that extra growth.

Carlos is the founder and current CEO of Microequities. He has worked in stockbroking, funds management, and investment research for over 15 years, and has been an individual investor in Australian Microcaps since he was 18 years old.

Carlos established Microequities to provide quality investment research on Australian Microcap companies. After being Head of Investment Research for five years, he became Chief Investment Officer of Microequities Asset Management in 2008. Carlos is a fervent supporter of Australian Microcap companies and the virtues of long term value investing.

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