The importance of the balance sheet

This week I want to drill down on the balance sheet and show that why, if you protect your downside, the upside will take care of itself. But first, I can’t go past The Reject Shop!

The Reject Shop $RJS: Bought under $3.00 March 2025 $6.68 Cash Takeover offer

TRS stock has more than doubled on a takeover offer from a giant Canadian retailer Dollarama for $259 million and it is one more example of what I’ve been talking about – you need to own about 20 small caps that have potential and good fundamentals and then simply hold on.

We’ve been buyers below $3 for many years and then we downgraded when it went above that. Our first bull point and what we talked about in our Risk Rating was the balance sheet, underpinned by cash and a network of stores. Now in big news this week it’s being bought for $6.68 in cash.

This $6.68 offer is a 112% premium to the $3.15 closing price on 26 March 2025 giving our members a great cash injection.

People make investing more complicated than it has to be because a lot of them are playing the momentum game. Where not in the momentum game, we’re in the making money game. The big thing here is the gap between the fundamental value of many out of favour small caps and the value that a corporate will put on it. They’re less price sensitive, believe me.

This stock wouldn’t qualify for fund manager portfolios, but it has for our dividend portfolios. I cannot repeat enough that you make your money by buying cheap and holding on.

What allows you to hold on is the balance sheet.  The Reject Shop grew its revenues consistently but its profitability was all over the shop.

The power of the balance sheet

One of the first things I came to grips with when I started analysing stocks was the balance sheet. Maybe that’s because I worked for a well known banking analyst, but we all know that when tough times come around, it’s the balance sheet that supports your valuation. That’s what keeps you in business.

Profits can ebb and flow but when they are under stress if you don’t have a strong balance sheet, your value can be eroded by a dilutive capital raise. Our job is to look for companies that are swimmers, which means having a strong balance sheet, which is the focus of this week’s issue.

All the stocks we analyse this week have strong balance sheets for different reasons. Many of them happen to be manufacturers, which really do require extra analysis in this department. I’m talking:

• Austal
• Clover
• Gale Pacific
• Nanosonics
• Integrated Research

One of the strongest is in software systems trouble shooter, Integrated Research, which recently got a big contract renewal with a company with one of the biggest balance sheets in the world, JP Morgan.

You need to do your homework when it comes to risk.

How to invest a lump sum?

We often get asked, how do I invest a lump sum? To help we’ve got a special report coming out in April for blue chip members on what to do if you’ve got a lump sum to invest. There’s very good analysis on how to get started, and how to preserve and grow your capital, which includes our Magnificent Seven Dividend paying Blue Chips.

As I keep saying build a core, then go for growth. It’s that simple.

To any non members: What are you waiting for?
Join today.

Need help? radar@undertheradarreport.com.au