In my career recommending investments, I’ve worked with some of the sharpest minds in the business.
I’ve drilled hyper-educated Wall Street analysts about their financial models.
I’ve dealt with some of the most ferocious floor traders in London’s Square Mile.
I’ve sat at the table with CEOs of companies from Beijing to Boston.
And I’ve advised smart self-funded retirees on how to manage their portfolios through volatile markets.
I’ve chosen to work in the global financial markets because I’m passionate and curious about what drives them. And now I’m bringing this experience to the Australian Small-Cap Investigator team.
Why?
Because this market is full of brilliant small-cap opportunities. I couldn’t have picked a better time to join.
So today by way of introduction, I’d like to share with you the three sectors of the Australian market I’m most excited about for 2014.
But before I do that, let me run you through the points of my background that qualify me to steer readers of Australian Small-Cap Investigator to the best small companies trading on the ASX.
I hold a Bachelor of Commerce and a Bachelor of Science from the University of Melbourne, with majors completed in Finance and Physics.
People often tell me that Science and Commerce is a funny combination. I disagree. The analytical skills you need to measure subatomic particles in a lab are surprisingly similar to the skills you need to size up markets and forecast cashflows.
I’ve also completed Level 1 of the Chartered Financial Analyst (CFA) program. The CFA is the gold standard for investment specialists worldwide.
After my studies I took a role in the London office of a global investment bank. It was my job to analyse every sector of the global economy and scour the US markets for investment prospects. I learned how fund managers operate, and what’s more, I learned the ways that individual investors can stay one step ahead. I’m looking forward to sharing these lessons with readers in the coming weeks and months.
Before I joined Kris’s team as the small-cap analyst, I was an investment adviser with an Australian stockbroking firm. During this time I worked with one of Australia’s most highly regarded small-cap advisory teams. Together we unearthed and analysed emerging companies, generated quality trading ideas and delivered these ideas to private investors just like you.
The key lesson I’ve learned during my time in the markets is that the small-cap space is the only place you’ll find turbo-charged stock returns. In the context of a global economy that’s ‘just going’, there’s only one way to grow your portfolio in leaps and bounds. I’m talking about carefully selecting shares in businesses that are busy penetrating, innovating and consolidating.
Those are the opportunities I love to find, and that’s why I’m so excited to join Kris and his team. Now for my top three small-cap sectors for 2014…
Technology
Innovation never stops.
Barely a month goes by without news of that fact.
Another industry disrupted. Another middleman cut out of the game. Another piece of high technology entering the hearts, minds and households of ordinary Australians.
We’ve known for a while that Australia boasts a wealth of creative know-how in technology. Wise investors are now cottoning onto the opportunities this creates.
In 2013, the money and backing available to early-stage start-ups took a great leap forward. Groups like Rampersand, Square Peg Capital and Tank Stream Ventures are queuing up to support small companies with good ideas.
Even Telstra and Optus are seeking a slice, with both recently unveiling new technology start-up incubators.
In my view this flow will continue in 2014, and the prospects for select Tech stocks should improve accordingly.
If you’ve acted on Kris’s stock tips in the Tech sector, such as AdSlot and BigAir, you should have seen strong growth in 2013. I’m looking forward to crunching the numbers and leading you to some more exciting Tech stocks that should become household names in 2014 and beyond.
Small Financials
I’m sure you’ve followed the fortunes of the big four banks with great interest in 2013.
Revenues, earnings and dividends all going from strength to strength.
Stock prices surging on the back of low interest rates and an insatiable thirst for dividend yield.
If you’ve been along for the ride, you’ve done well. So well, in fact that valuations have blown out to a massive premium versus the global banking peers.
I believe the major banks will struggle to deliver the level of earnings in the future that’s implied by share prices today.
I like smaller firms that are flexible enough to embrace alternative lines of business. I’m talking about anything from purchasing non-performing debt, to short-term lending, to coming up with innovative structured transactions. In other words: places where the big banks fear to tread.
These are the spaces where nimble, aggressive firms can rack up amazing growth in a matter of months.
Agriculture
Food security has been gaining momentum as an Australian investment theme for some time now.
It’s not hard to see why. The megatrends are well-documented.
Emerging economy diets are becoming more intensive. This means fewer cereals and more meat, dairy, sugar and oils. These economies are leading the growth in global demand for food.
According to the United Nations Food & Agriculture Organisation, between 2010 and 2040, the world will consume as much protein as it has throughout history until now. That’s an astonishing statistic. It demands attention in an agricultural exporting nation like ours.
Who can guarantee supply for this enormous unmet demand?
Will it be companies like Australia’s fourth-largest milk processor, Warrnambool Cheese & Butter, where patient investors have made a mint as the battle for control has reached fever pitch?
Or will it be other, smaller companies who understand the challenges of disease, quality and food security?
The companies best-placed to benefit from the rise of Asian consumption are largely unknown today. Watch this space as I investigate innovative little companies with guts, foresight and first-mover advantage. Their stock trades at just cents in the dollar today, but these are the companies that could crack the Asian export enigma and generate massive returns for your portfolio.
These are the corners of the market that are getting me energised right now. There are so many opportunities in this market that I don’t believe any investor has an excuse for being on the sidelines.
Here’s to a happy, successful and prosperous 2014.
Tim Dohrmann,
Small-Cap Analyst, Australian Small-Cap Investigator
Ed Note: The above article is an edited extract from an update published on 6 December to readers of Australian Small-Cap Investigator.
