The share market average return is 10.5% a year.
Small companies only grow when profits are reinvested, and when a company’s sole objective is to maintain a high dividend yield, it doesn’t augur well for long-term value.
Compare Telstra’s return with the gold producer, Newcrest Mining. The miner delivered an average annual dividend yield of 0.78 per cent between 2000 and 2012 with the annual dividend increasing from 5 cents in 2000 to 35 cents in 2012.
An investor that bought Newcrest in 2000 would have achieved a total return of 406 per cent in 2012, comprising a 363 per cent price return and a 43 per cent dividend return
Gold
First tipped 14 February 2016 @1.06
Original Thesis: Smaller West Australian Gold miner.
What drove the return: Earnings and multiple expansion. Growing production from a diversified asset base assisted by merger and takeovers. Also benefiting from low cost of production and a rising gold price.
Contractor
First tipped 30 December 2020 @$0.365
Original Thesis: A quality contractor operating in the mining space; always had a great niche. Not just anyone can handle big electrical projects. Exposure to growth in the mining sector, but what impressed was the advance into the industrial customer base. The stock was also very cheap.
What drove the return: Earnings and multiple expansion. Two words: data centres. Market credibility and key relationships in a critical niche. Has an impressive niche and is now one of the few Australia wide operators that can handle very big, very complex projects.
Information Technology
First tipped 21 November 2018 @$0.965
Original Thesis: Founder led IT company, switching into data centres. Solid balance sheet. Founders with long-term vision and getting traction with government contracts.
What drove the return: Earnings and multiple expansion. Backing founders who kept reinvesting and not raising equity. Secured big recurring revenue contracts with government and corporate clients. Expanding data centre footprint plus generating more value from consulting.
Contractor
First tipped 20 March 2019 @$3.01
Original Thesis: This stock frustrated for a while, with the share price going down and sidewards. The business of designing and constructing mineral processing plants is complicated. But we liked the IP, as the author of feasibility studies, which then leads to engineering procurement and construction (EPC) work. The stock was also very cheap and we liked one of the founders Joe Ricciardo, who was also executive chair.
What drove the return: Earnings and multiple expansion. The group has grown its work in hand and has delivered great earnings appreciation because of its low capital requirements, boosting return on equity, which has compounded over time.
Information Technology
First Tipped 21 November 2018 @0.965
Original Thesis: Quality IT stock with a broad product offering. Reputable business with a corporate client base. Very cheap.
What drove the return: Earnings and multiple expansion. A substantial component of DTL’s business is relatively low margin software sales, but 69% of revenue comes from recurring contracted payments. We think DTL is a keeper, and we welcome opportunities to buy it cheaper. You just have to see how quickly the stock bounced back this year after the software apocalypse led selling.
Gold Mining
First tipped 13 July 2016 at $0.66
Original Thesis:
A young CEO with extensive experience as a contractor in Barminco, developing a mine near Kalgoorlie that kept delivering better than expected production. Bill Beament left Northern Star with a world-class gold mine and the company has gone on from there.
What drove the return: Earnings and multiple expansion. Building a portfolio of world class gold mines both in Australia and abroad, in Alaska. The Kalgoorlie Super Pit, KGSM has proven to be a particularly good move.
Gold Mining
First tipped 18 March 2015 @$0.72
Original Thesis: A young CEO named Jake Klein, who had left Macquarie Bank and was a gifted deal maker. Quickly used his deal making skills to purchase a portfolio of domestic mining assets.
What drove the return: Earnings and multiple expansion. The mine portfolio grew and grew, funded mainly by debt and impressive exploration. The gold price also helped.
Retail
First tipped 14 June 2012 @0.83
Original Thesis: A founder led business that had a very strong balance sheet, with lots of cash, a good brand name and was very cheap.
What drove the return: Earnings and multiple expansion. Innovative business model where furniture isn’t made until the order comes in from the show-room. Returns are much higher than average because working capital is so low. They had a very good supply chain and they have scale to out-compete on price. They invest in the brand.
Lithium Miner
First tipped 16 December 2021 @0.86
Original Thesis: Lithium was a growth resource essential to the future green economy. There were a number of operators that were developing hard rock resources in Australia, as well as lithium brine developing in South America. Pilbara Minerals, as it was called then, was one of the leaders on the ASX.
What drove the return: Earnings and multiple expansion. The group turned from developer to producer at scale faster than other operators and with less hiccups. PLS has also merged successfully with other operations and has lower costs of production, which enabled it to survive a big fall in commodity prices.
Industrial
First tipped 19 May 2022 @0.40
Original Thesis: Manufacturer of world class naval ships in the littoral class. Had gone through a painful transformation involving a dilutive equity raising. Balance sheet was strong and stock was very cheap, trading at a discount to net tangible assets.
What drove the return: Earnings and multiple expansion. The US business was grew very quickly when the company won preferred supplier to the US Navy. The company benefited from the focus towards Asia and from success in building programs.
1 in 5 of our small companies are taken over. Why? Because they are quality small companies, growing fast and outperforming in a niche environment.
We have many examples of this. Think Afterpay first tipped at $2.15. But in 2024, $SLH, $QHL.
Our analyst team provide in-depth special reports on our favourite stocks in growth sectors.
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Our analyst team review the buy, sell, hold recommendation every week. We interview management, analyse all results and review all company announcements. We release research updates with any material announcement/share price move/anything of significant that our team thinks shareholders should be aware of.
Our reports are published each Thursday morning and there are typically 8 small caps covered in detail each week.
We initiate research on 12-24 new ASX stocks each year. We do not have one each month, based on a publishing schedule, we release stocks when our analysts decide it is the right time to buy it.
We review stocks once they have listed. IPOs are often difficult to make money from until they have traded for months sometimes years.
In our small caps research report our universe of stocks is from micro-caps at $50 million to $500 million at the upper end of the small cap range.
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