My Latest #1 Small Cap ASX Share Idea
From speaking to Australia’s leading ASX investors I’ve learned two things:
- Taking calculated risk is important. For example, some experts use debt during market corrections (e.g. the GFC) to scoop up dirt cheap stocks, others use short selling or derivatives, and many will invest in shares of tiny companies (which are often considered to be far riskier than large established blue chips)
- Only buy what you can understand. Nobody falls to the top of the mountain. The best investors check their emotions at the door, invest in themselves and do the work required to have an opinion.
Fortunately, this is exactly how I approach investing in Australia’s leading companies.
Too Good To Be… Undervalued
In June, when we launched our members-only service Rask Invest, I wrote to Investor Club readers:
“The first ASX investment idea I released to Rask Invest members has 2 analysts following it…
This tech company has stolen 5% market share from massive rivals like Philips and General Electric since 2012.
It’s little wonder why its share price is up more than 1,500% in 5 years.”
On Friday, I had to move the company’s shares to a HOLD.
Since June, the company’s share price has risen by almost 45%! I repeat, in around 3 months it has risen almost 45%!
It wasn’t easy to move my first small-cap ASX investment idea to a HOLD rating.
I had to remind Rask Invest members of how I invest on behalf of the Rask Invest model portfolio (note: I’ve excluded the name because I reserve my official investment ideas for Rask Invest members only).
“[Company X] is a rapidly-growing business. In my opinion, it has a great management team which has consistently delivered what they said, and it’s got a long runway ahead.
Indeed, not much has changed since I released the initial share idea back in June.
The primary reason I’m moving [Company X] shares to a hold rating is valuation.”
It may not seem like it given the recent jumps in some ASX shares but no matter how impressive a company is, understanding valuation is vital.
I still expect the company to grow its profit over the coming years and I wouldn’t be surprised to see it outperform the ASX 200.
But after a 40%+ rise in around 3 months, I felt it was important to pinch myself and ensure investors pay a reasonable price for a slice of the company.
My #1 Small-Cap Idea
Fortunately, I went one better on Friday and released my latest #1 ASX small-cap investment idea.
This company is so impressive that I couldn’t ignore its potential any longer. When I emailed Rask Invest members to provide my full analysis on the latest investment idea, here’s what I said:
“Rask Invest members who decide to buy this investment idea should be familiar with the idea of illiquidity.”
My newest under-the-radar ASX small-cap investment idea is so small most big investors can’t buy it.
There simply aren’t enough shares to go around! Most of the shares (60%) are owned by the founders and management.
I did the math:
“Over the past year, on average, around $33,000 worth of [Company Y] shares traded on the market each day.”
To put that in perspective, around $130 million of Telstra shares traded on Monday, according to data from CommSec.Of course, my new #1 ASX idea has its fair share of risks. Competition, regulation, illiquidity… the list goes on.
So why did I make such a small ASX-listed company my most recent #1 share idea?
- It has grown revenue by 100% in each of the past 3 years
- It has never lost a customer (it’s been operating in full swing for ~4 years)
- Its average customer contract is 7 years!
- It is founder-run, by two guys who own more than 30% of all shares in the company (combined)
- It sells an essential good to customers (meaning, it’s not a ‘concept’ stock)
- I estimate its shares are currently trading for just 6x its future profit (and it will pay generous dividends once it reaches scale)
So why are the company’s shares so cheap?
I think there are a few reasons:
- No sell-side analysts follow it. Meaning, I couldn’t find one research report written by the big investment banks or brokers.
- It’s tiny. Most major fund managers (e.g. those with $100m to invest) wouldn’t bother to research it because they wouldn’t be able to buy enough shares to move the needle on their returns.
- It’s not profitable (yet!). The company is still using cash from its balance sheet. Meaning, unless it continues to slow the cash ‘burn’ it may need to raise capital. I admit that may happen. But I’m fine with that because I believe the valuation is so good and the opportunity is so impressive that it might actually be a good thing!(that’s something I’ve never said before)
And for a small long-term investor like me, none of those concerns should scare me away from what could be a true ‘multi-bagger’ opportunity for the Rask Invest model portfolio.
As I said, my latest #1 share idea comes with extra risk. But successful investing is about taking calculated bets.
It’s about doing the hard work and research to know the risks and the potential for outsized returns.
I know from experience that if an investor finds enough investments offering these ‘asymmetric’ return profiles, he or she would be crazy not to take them.
And with 5 official investment ideas in the Rask Invest model portfolio already, plus one more on its way in coming weeks, I’m eager to put my money to work in a higher-risk investment idea. Click here to get the names of my 5 ‘official’ investment ideas.
(note: I have to wait 5 full market days after I release an investment idea to Rask Invest members before I can buy shares for my model portfolio — allowing our members plenty of time to buy it first).
My only hope is that I can scoop up enough shares to reach my 7.5% allocation before other investors beat me to it!
Cheers to our financial futures!