2018: Small Caps In Review

By Tim Boreham | More Articles by Tim Boreham

2018 began with bundles of promise for small-cap investors, but ended in misery interspersed with some rare delights. Your columnist trawls through his coverage for the highlight and lowlights and highlights potential opportunities for 2019.

A tale of two halves, bookended by elation and misery.

That’s our best summation of 2018, which saw the all-ordinaries index climb a healthy 5 per cent, but then fall some 13 per cent after investors took an angry turn in early September.

Naturally, the initial enthusiasm for speculative sectors such as cannabis, bitcoins/blockchains and early-stage resources vanished in unison.

How did The New Criterion fare during a year that promised so much but ultimately delivered dollops of misery?

Strictly speaking, your columnist does not recommend stocks for (a) legal reasons and (b) a profound lack of real insights. But being of sunny disposition, he does try to cover stocks that have a snowflake’s chance in Hades of going somewhere.

On that count, our 2018 coverage produced mixed results and many of the companies are a work in progress. Or maybe we’re just being polite.

In January we covered the tech tearaway Titomic (TTT), which by then was trading at 80c, having listed in September 2017 at 20c. Shares in the 3D metal printing play have since risen threefold, having achieved first revenue in the third quarter.

Another stellar performer was the obscure Perth-based recruiter RBR Group (RBR), which was trading at 0.6c when we aired their story in mid August.

RBR shares have more than doubled as punters wise up to RBR’s potential in Mozambique, where it has an effective monopoly on recruiting up to 50,000 workers for two huge onshore LNG projects costed at $US50bn.

RBR remains valued at less than $10m.

Shares in gambling play Jumbo Interactive (JIN) have more than doubled since we covered them in February. Jumbo holds the exclusive rights to sell lottery tickets online for the merged Tatt’s/Tabcorp and benefits from a regulatory clampdown on the activities of derivate lottery rival Lottoland.

In the medical sector, Polynovo (PNV) shares have surged 23 per cent since July, when we noted the potential of the company’s Novosorb, a scaffold-type device for surgical and reconstructive wounds using technology developed by the CSIRO.

Avita Medical (AVH) has an alternative spray-on skin treatment called Recell, which won US regulatory approval in October. The shares have proved a slow burn, although the company raised a chunky $40m in early December.

In January we pondered whether the emerging blockchain mania was just another form of crypto craziness, or a more respectable iteration of bitcoin and its many cousins.

We boldly proclaimed 2018 as the “year of the blockchain – the underlying technology supporting crypto currencies.”

Sadly, all the blockchain-exposed companies we cited have been routed share-price wise. Logistics group Yojee (YOJ) has lost three quarter of its value, despite reporting reasonable progress.

Still, the rewards still await the companies that are able to harness the complex technology to improve their supply chains.

Some of the companies we mentioned are no longer with us, for better or worse.

As we penned a piece on Viralytics in February, the immune-oncology house was mulling a $500 million takeover by global drug giant Merck. A 160 per cent premium on Viralytics’ then share price, the deal reinvigorated the sector’s animal spirits, although similar deals have yet to materialise.

Management of the struggling listed investment company Wealth Defender Equities was taken over Geoff Wilson’s WAM Capital — a humane act for the fund’s long-suffering shareholders.

Capilano Honey fell into the sticky hands of private equity, amid (unproven) claims that some of its product was not the genuine bee’s knees.

And not for the first time, chemist owners and drug developers Australian Pharmaceutical Industries (API) and Sigma Healthcare (SIP) are planning to merge – a proposal the competition regulator will have much to say about.

As general themes, your columnist still likes nickel and tin stocks for the role the commodity plays in electric cars and electronics generally.

Wisely, investors are rediscovering the safe harbour qualities of gold. Australian producers are especially well placed, having chipped away at costs and made some decent discoveries.

In May we noted the potential of the long-subdued uranium sector, given that some big producers had curtailed production. Indeed, the uranium price has since recovered from the $US23 a pound level to around $US29/lb.

Oddly enough, uranium stocks such as Paladin Resources (PDN), Vimy Resources (VMY), Bannerman Resources (BMN) and Toro Energy (TOE) are yet to glow.

Leading childcare operator GE Education (GEM) stands to benefit from the government enhanced childcare subsidies introduced last July.

Arguably G8’s $1.3b market cap takes care of the upside, so perhaps the ones to watch are the smaller rivals Think Childcare (TNK) and Mayfield Childcare (MFD).

In the vocational education sector, shares in well-run Redhill Education (RDH) ran hard after we mentioned them in early month, but have retreated since October. A case of back to remedial class, despite management’s solid earnings outlook which should at least earn it an A for effort.

Investors have been especially interested in data centres, which in essence are temperature-controlled buildings to house servers. As long as the cloud economy continues to thrive, so too will data centre operators such as industry leader Next DC (NXT) and the fledgling Data Centre Network (DXN), which listed in April.

Eden Innovation (EDE) had made good progress in commercialising its concrete technology in the US, targeting the road and bridge building sector. But it’s yet to be reflected in the company’s valuation.

In the $50bn a year defence sector, Xtek (XTE) remains a stock to watch as it wins more contracts pertaining to military drones and ballistic plates and helmets. Once again, Xtek shares have sagged despite the company’s expectation of current year revenues of up to $26m, compared with $17.3m in 2017-18.

As a topic wealth management platforms aren’t exactly Christmas barbeque stoppers. But they’ve oozed sex appeal as an investment and should continue to do so as trillions of dollars continue to flow into the managed fund and self managed super sectors.

The listed exponents are HUB24 (HUB), Netwealth (NWL), Praemium (PPS) and the smaller Managed Accounts Holdings (MGP).

Holding an eclectic mix of assets, Authorised Investments (AIY) proved a topsy-turvy ride for investors during the year, with its shares spiking from 2c to an April peak of 19c.

The reason for the interest was a two-stage deal pertaining to Hong Kong based digital advertising assets. As is the case with complex deals it encountered more snags than the aforementioned barbie and the shares are back in that 2c territory.

Criterion’s key regret for the year was covering the then obscure life insurer Freedom Group (FIG) in May.

We thought the group might have been well placed, given the banks’ retreat from the sector. As it happens, Freedom was part of the problem and the company now struggles to survive after revelations of unsavoury sales practices were aired at the banking royal commission.

With a treacherous 2018 now behind us, let’s hope the market gods (and Donald Trump) do the right thing by investors in 2019.

At least investors won’t be buying in at the peak of the market.

Tim Boreham

About Tim Boreham

Tim Boreham edits The New Criterion. Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades' experience of business reporting across three major publications.

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