Bargain shares among the small caps – MoneyWeek

Sohasthenadirbeenreached?

Byhistoricstandards,relativevaluationslookundemanding,butnotoutstandinglycheap。

TheHoareGovettIndex(HGI),whichrepresentsthelower10%oftheUKstockmarketbymarketcapitalisation,tradeson13timesearnings。

Whilefarfromdemanding,thisisapremiumtotheFTSEAll-Share。

Inpreviousdownturns,theHGItradedatadiscounttothewidermarket。

Anotherwaytogaugewhetherabottomhasbeenreachedistoexaminethediscountatwhichsmall-capinvestmenttruststradecomparedwiththeirnetassetvalue。

Thisstandsat17%-21%,muchworsethanthehistoricaverageof10%-15%,butnotyetatthetroughlevelsof25%seenin2002/2003。

Sotheevidencepointstopossiblefurtherfallsinsmallcapsbeforethebottomisreached。

That’snottosaythattherearen’tsomegreatopportunities。

We’vefavouredsmallcapswithdefensivegrowthcharacteristicsoverthepast12months。

Giventheuncertaineconomicoutlook,we’rehappytoretainthisstance。

Oneinteresting-lookingfirmisSynergyHealthcare(SYR)。

Itssharepricehassufferedrecentlyduetoseveralfactors。

TherewerefearsthatCEORichardSteeveswouldbeforcedtosellachunkofhis4%staketoavoidtheriseincapitalgainstax。

ThiswasresolvedafterhesoldsomesharesthenimmediatelyrepurchasedtheminhisSipp。

AsecondworryhasbeenSynergy’supcomingmovefromAimtothemainmarket。

Thisrequiresachangeintheshareholderbase(asfundsrestrictedtoAimstockssellout)。

Synergyservesavarietyofdefensiveandfast-growingmarkets,whichincludesurgical-instrumentdecontaminationandsterilisation。

Thejury’sstilloutonthepurchaseofdecontaminationbusinessIsotronlastyear,butmanagementhasagoodrecordofimprovingtheperformanceofacquiredbusinesses。

SynergycouldalsobeamajorbeneficiaryofUShealthcareequipmentmanufacturersoutsourcingdecontaminationactivities。

Addinthatitisasignificanteuroearner(goodnewsforafirmthatreportsinsterling)andwethinktheshareslookcheap。

AnotherdefensiveisDechraPharmaceuticals(DPH),aninterestingcombinationofalow-margin,mature,butcash-generativeveterinary-productsdistributionbusinessandahigh-growth,high-margin,veterinarydrugsbusiness。

ThedistributionunithasstrongUKmarketshareandthrowsoffcashfordevelopingnewtreatments,butit’sthepharmaceuticalarmthatgeneratestherealexcitement。

DechraplanstolaunchtwoofitsestablishedEuropeanpharmaproductsinAmericathisyear,whiletherecentacquisitionofEurope’sVetXXhasgivenitaEuropeandistributionnetwork。

WealsolikeHargreavesServices(HSP),amini-conglomeratewithinterestsrangingfromproducingcoalatMaltbyCollierytomineraltradingandcokeproductionatitsMonktonworks。

Muchofitsproductionistiedintofixed-pricecontracts,butifcurrentspotpricesaremaintaineditshouldseeasignificantupliftinprofitswhenthesedealsexpire–somethingthat’snotbuiltintobroker’sforecasts。

ThestocksJamesChapmanlikes

Stock,12mthhigh,12mthlow,Now

SynergyHealthcare,902p,566p,620pDechraPharmaceuticals,430p,293p,377pHargreavesServices,645p,438p,542p

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