Companies with tiny valuations are inherently more risky. But they also offer more excitement for punters.
The problem with small value stocks is that they can become traps for investors; perma-value dreadfuls whose inherent value is never realised but gradually ebbs away with losses, salaries and other emoluments, expenses and the like as long-suffering shareholders suffer a slow death.
But putting that happy little scenario aside for one moment, such stocks in (usually…) unfashionable areas and industries can also have their day in the sun, rewarding long-term, patient investors. If following fashion is the enemy of stock market success, so the converse should be true. In other words, obscure and unloved companies that display a number of value characteristics (preferably cash, book value, no debt and profitability) with good management should be sought out.
The biggest danger, perhaps, is a delisting -- a tactic which has become worryingly popular in recent times with small companies. The other big danger, besides value erosion, is more of a psychological one; sheer ennui. You may need the patience of Job to realise a profit.
Anyway, now that's all out of the way, let's have a look at a few potentials…
Chapelthorpe
Chapelthorpe (LSE: CPL) is an unfashionable company in an unfashionable sector. It makes fibre for carpets and has been a serial value disappointer in the past. It's now reached a stage where investors seem to have lost interest and is valued at an exceedingly measly £2m at the mid price of 10.25p. Yet the final results for the year to the end of March were reasonably resilient in difficult circumstances.
The company made pre-exceptional EBITDA on continuing operations of £2.8m on sales of £86.2m and had net tangible assets (NTAV) of close to £16m. Let's not get carried away though; the company expects this year to be challenging and is approaching it "with caution". The trading update for the first quarter was positive, but didn't give much away.
Northamber
Fully listed IT supplier Northamber (LSE: NAR) is valued at less than £13m at the mid price of 44.5p but has net assets of 89.4p a share, with net cash of £14.1m -- 48.5p per share -- and managed to make a small pre-tax profit last year. Trading is difficult, though, and the company made an operational loss of £320k -- with the difference being made up by investment revenue.
The main drawback here is the near 60% holding of the Chairman. This is both good and bad. Such companies are more difficult to realise the value of, but more lucrative if ever that value is outed as any bid has to be at a decent premium to the current price.
Electronic Data Processing
Computer hardware supplier Electronic Data Processing (LSE: EDP), also fully listed, made a pre-tax profit of £0.34m on sales £3.1m in the first half. The company made over £1m pre-tax profit last year on sales of £6.9m, but is valued at just £5.6m. It recently completed a buy-back of its own shares returning £6m to shareholders, but still has a debt-free balance sheet, cash of over £2m, and NTAV of over £7m. It also expects a reduction in staff numbers to generate annual savings of over £0.4m.
Although trading is difficult, recurring revenues account for three quarters of turnover and fully cover the company's day to day cash operating costs. This company has attracted the interest of property speculators in the past due to its attractive headquarters at Beauchief Hall in Sheffield.
Titon Holdings
East Anglian ventilation and window products maker Titon Holdings (LSE: TON) weighs in at a mere £4.4m at its mid price of 42p -- despite doubling since April. Titon's interims to the end of March show a pre-tax loss of £0.4m due to the sharp drop in construction activity, but also reveal net cash of £2.5m, over £9.7m in NTAV, and various cost-saving initiatives in place.
Hartest Holdings
Hartest Holdings (LSE: HTH) looks the most interesting of the bunch. Recently the subject of a possible takeover that is now off the cards, the companies within the group are technical specialists supplying instrumentation and medical equipment. At 35.5p, Hartest is valued at a fraction over £3m, but last year made operating profit before non-recurring costs of £0.3m with healthy margins maintained despite the recession on sales of over £20m, and had a net asset value of £7.6m.
The company also announced last month that the new financial year has started well, and trading by all group companies is in line with, or ahead of, the Board's expectations. Gross margins are improving, overheads are under close control and dividends will be reintroduced from December if the good performance continues.
More share ideas from David Holding:
David owns shares in Hartest & Chapelthorpe.
