MARKET COMMENT
Hunting For Smallcap Value Shares

By Bruce Jackson (TMFGoogly)
December 23, 2003

Smaller companies have been the place to be in 2003. Here's the year to date returns of some selected smaller company indices.

You'd probably have done even better than this if you'd invested in one or more of the star performers of 2003, each of which rose by over 300%.

Looking back on stock market winners is only really satisfying if you've happened to pick one of those big winners. If you've been skilful and/or lucky to get a 300%+ winner in one year, well done to you! If you haven't, like me, don't despair. There are plenty of winners out there for 2004, and they are just waiting to be discovered! The hard part is finding them!

Despite the rise of the indices noted above, the smaller company sector should still be fertile hunting ground for winning investments. That's because there's usually a much better chance of you finding an over-looked, out of favour smaller company than you are a bigger one. I say usually, because every now and then, some big companies suddenly become attractive investment options, but that is relatively rare.

So...where are these small company winners lurking? A relatively quick scan through the smaller reaches of quoted society came up with the following possible winners. Please note these are not tips. Although the companies look cheap based on fundamentals, they are generally companies low on competitive advantage. At the moment, it is difficult to find investing nirvana - a company with a strong competitive advantage trading at an attractive price. Anyway, on with the show...

Potential Recovery Situation

THB Group (LSE: THB)

A small insurance broking group. Hardly the most dynamic industry in the world, and very competitive. Made the classic mistake of making an acquisition and then seeing it significantly under-perform expectations.

Why the attraction? I can sense a dose of humble pie in the Chairman's recent outlook statement.

"...the immediate priority is to concentrate on securing value from the core business and the acquisitions made over the last twelve months."

THB has previously enjoyed healthy profit margins. As they batten down the hatches and work on making previous acquisitions work, profits could rapidly recover. But, it's a very competitive business, insurance rates are softening, and they could go out again and make another silly acquisition. You pay your money and take your chances!

Potential Crisis Play

Ideal Shopping Direct (LSE: IDS)

Ideal Shopping Direct runs one of the UK's leading live TV Home shopping channels. Basically they are a retailer, with an attractive distribution potential of 7.4m homes. But, at the moment, they are not a very good retailer, having had two profit warnings in the last three months. Operationally, they are a mess. They are expecting to report a significant trading loss for the year ending December 2003.

The attraction? For some strange reason, I'm bizarrely attracted to rubbish like this. If management can turn things around, and they are making the right noises, profits could rapidly recover. An operational turnaround of some proportion is required here, and there's a chance the company may never be profitable. I mean to say, who ever has bought something from those awful TV shopping channels? Not me!

High risk, potentially high return.

Potentially Overlooked Gem

Oystertec (LSE: OYS)

Calls itself an engineering intellectual property group. I think of it as a plumbing company.

On 14 November 2003, a trading update said the following....

"the Directors are confident that profits before amortisation and exceptional items for the year ending 31 December 2003 will be materially ahead of current market expectations."

The day before that trading update, the shares stood at 17p. Today they stand at 15.5p. To the naked eye, it seems the market has overlooked and/or forgotten all about Oystertec. Seems the directors haven't, as two of them bought shares in their company at 15p on 1 December 2003.

A little bit more expensive, plus they have some debt, but arguably a little less risky.

Numbers Summary