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Are the JSE's small caps good buys - or not?

by , 11 December 2019
Are the JSE's small caps good buys - or not?
There are 322 shares on the JSE with market capitalisations of lower than R5 billion. These shares (bar a few ETFs and Preference shares) we can call ‘small caps'.

These are the smaller shares on the JSE that don't fit into the Top 40, or the Mid Cap indices.

We can further segment these shares - looking only at PENNY SHARES. These are small caps with share prices below R10. Of these shares, there are 245 listed on the JSE.

So, are any of these small caps investable? How do their prices compare with larger stocks on the JSE?

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JSE penny stocks are some of the most attractively priced shares I’ve seen in a decade
Now let me state this upfront. Not all cheap penny shares are good investments. That said – there are scores of them that are – investors simply haven’t discovered these little stocks yet…
So, as part of a simple share filter I’ve done I had a look at penny shares that sell at Price Earnings ratios below 10 for a start.
There are 65 of these companies.
The list is too long to post – but I’ll give you the highlights on some I keep on my radar:
Here’s the amazing bit – consider a company like Santova.
In the last 19 results releases (interim and finals) the company’s grown earnings per share 17 times.
What’s more – it currently trades on a PE of only 4.77 – compared to the JSE All Share Index average PE of 15.61.
And if you look at other metrics you’ll find that Santova’s net assets (all its assets minus all its liabilities) are worth 311cps.
That means its share price is at a 46.94% discount to what the company is worth.
The company’s bank balance sits on R61 million – compared to its market value of R266 million.
Strip out this cash and the company’s even cheaper.
Especially considering it has very few long term loans.
And this isn’t just me picking the best example…
Go through the figures for most of these companies and you’ll find they’re in great positions – yet investors are treating them as if they are going bust…
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More penny stocks with incredible records – selling for a fraction of their value
Consider Bowler Metcalf. The company had turnover of R92 million and earnings per share of 18c in 2001.
Today its turnover has grown to R542 million with earnings per share at 88.1c.
The company has had an uninterrupted dividend since 1992!
For 2019 you’d have received 40cps in dividends – which totals to a 5.33% dividend yield compared to the JSE average yield of only 3.8%.
Bowler’s NAV is 831c – meaning that you still get nearly 10% of the company for free on top of this long term record of growth and a consistent dividend.
Argent Industrial have been undergoing with a turnaround over the past five years. It’s earnings per share in March 2015 was 40c. In June 2019 it released earnings of more than double that at 104.4cps.
The company sits on R94 million cash compared to a market value just north of R400 million. In fact, directors see the share price as so cheap the company plans on buying back up to 15% of its own shares with the cash it has on hand. With a net asset value of R13 compared to a share price of R5.80 there’s plenty of upside potential if the company buys back more shares…
In the coming weeks I’ll share more of these uber cheap penny stocks with you – and we’ll explore some other ways of looking at these stocks to see if they are simply cheap – or if they are traps…
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares
P.S: Did you miss out on Capitec’s phenomenal share price rise? Here’s how you could be part of SA’s next great success story

Are the JSE's small caps good buys - or not?
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