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2021 starts off with a bang for small-cap shares!

by , 14 January 2021
2021 starts off with a bang for small-cap shares!
Small cap stocks have had a tough time in recent years. While the underlying businesses in many cases did really well - their share prices didn't.

Between March 2016 and March 2020 the Small Cap Index was down 44%.

In the last 6 months though, the Small Cap Index is up 25%, erasing a great portion of its past losses.

And thus far 2021 looks like a scorcher for small companies.

In the past week there are 151 penny stocks that saw their share prices grow.

Of these companies 25 saw their share prices increase by more than 10% in the last week.

If you look at the last four weeks, there are 43 penny stocks that have seen their prices increase by more than 10% and 18 that have gone up by more than 20%.

And in the last 3 months, there are 32 penny stocks that have grown by more than 50% in value.

Simply put - smaller companies are at last enjoying their day in the sun again…

So, what's behind this rise?

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SA Inc Penny Stocks that are selling at 20%, 30% and even 50% discounts
 
Right now, penny stocks on the JSE are selling at huge discounts. These companies often have outsized profits compared to their miniscule share prices.
 
Companies with decades of profit and dividend growth selling at PE Ratios of less than 6.
 
The net asset value (NAV) represents the net value of a company and is calculated as the total value of the entity’s assets minus the total value of its liabilities.
 
So, if a company owns R1 billion worth of assets, and R100 million in debt it has a net asset value of R900 million. If the same company has 100 million shares in issue it will have a net asset value per share of R9.
 
Now, if the share price is R5, it means the company trades at a R4 (or 44%) discount to its net asset value.
 
Right now, there are at least 110 companies on the JSE that are selling at a more than 20% discount to their net asset value!
  
Combine discounts with big profits and you have a
winning combo
 
At the same time, there are around 52 penny stocks trading at a PE of less than 10 right now.
 
So, I combined the above two metrics – and found a list of around 34 companies that are selling at a discount to their asset value, and a really cheap PE ratio…
 
The companies that came up include some of my favourites:
 
Penny Share #1 – Rapid growth as this company goes offshore
 
Argent Industrial (JSE: ART) is a small JSE listed industrial company.
 
Its main businesses are in the steel industry, supplying warehouses with overhead cranes, pallet trucks, storage systems, trolleys for shops, and gates and burglar proofing to homes and businesses alike.
 
Back in 2015 the company was mainly a local business, with some growing and some struggling businesses in its portfolio. It then set out to get rid of, or turn around, struggling businesses. And more importantly it started diversifying its income streams by investing into businesses in the USA and the UK…
 
This strategy helped the company increase headline earnings per share (HEPS) from a mere 40c, to 104.4cps in 2019. That’s 155% growth in profits, showing their strategy worked.
 
And right now, the company’s still selling at a 44% discount to what it is really worth. Net asset value per share, a measure of the value of all the businesses and investments the company holds, sits at a whopping R13.05. The share price is at a mere R7.24 at a 44.5% discount to its real value.
 
The company is unencumbered by high debt levels, and is cash flush. What’s more, the business has gone from only about 20% of its profits from offshore sources to now being in excess of 60% offshore based.
 
Penny Share #2 – A packaging company with a huge dividend
 
Bowler Metcalf (JSE: BCF) is a plastics and packaging company.
 
It’s completely debt free and the company’s aggressively grown its dividend over the last three decades.
 
 
As you can see – it has steadily improved the dividends its paid to shareholders over the years.
 
But lately the company’s kicked it up a notch – it has now also started doing share buybacks.
 
In the past year it bought back around 7.4 million shares. That’s basically 10% of the company’s total shares in issue. And considering how strong its cashflows are, Bowler can buy back the same amount of shares this year as well as pay a dividend larger than 2020’s.
 
Based on management expectations it will pay a 46.50cps dividend for 2021 – equal to 5.81% on the current share price. If the company does share buybacks again this year, and sees slight growth in earnings – it could see very good bottom line growth.
 
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Penny Stock #3 – Santova
 
Santova is a global logistics company. It has weathered the Covid storm very well, and I highly rate the stock.
 
The company just announced a R12.5 million share repurchase between R2.20 and R2.85 per share.
 
The company did this with cash on hand – and as it generates more cash this year it could do more share buybacks. Especially with its share price being this cheap.
 
At 280c, the company’s shares trade on a PE of only 6.32. At 349c net asset value shares are still trading at a discount of 20% to what they are really worth.
 
Even though Santova shares have shot up 36% in the past three months, the stock is still almost 36% below its three year high.
 
But results released on 27 October 2020 show why investors have started favouring the company again…
  
Revenue for the six months March – August 2020 came in at R207 million compared to R187 million in 2019. Earnings per share grow to 21.81cps from 18.31cps in the previous year. And the company now produces the bulk of its profits from offshore instead of SA.
 
In short – this is a global logistics business, listed in SA.
 
Net asset value per share is 349c, compared to a 280c share price. So you’re still getting the stock at a discount of around 20%. At its height, the stock traded at DOUBLE its NAV… That means nearly R7 a share compared to R2.85 share price of today…
 
Just like these three stocks, there are many other highly attractive small cap and penny share companies on the JSE right now. Some of them are simply too attractive to ignore…
 
Here’s to unleashing real value
 
Francois Joubert
Editor, Red Hot Penny Shares


2021 starts off with a bang for small-cap shares!
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