At this time of year, I normally put together a nice little article with some broad strokes about what I think the year ahead will hold.
The rise of Populism and the potential proliferation of Black Swan events leads me to conclude that I have no clue what the future will hold. Well, to be fair, I never knew for certain what the future held, but now more than ever the macro- and micro-forecast risk is elevated.
Instead of putting my head on a block with a whole bunch of forecasts, I’m going to do the opposite. I’m going to reference some things I’ve previously written that I believe are either very relevant or great stock picks that should do well (despite any macro-chaos).
In that sense, I am lucky: I don’t need to be massively accurate (or at all!) with my macro-forecasts to generate investment returns. I just need to back the right management teams in the right businesses and hold them, no matter what (unless the “narrative” changes).
In a way, a good small cap investor pushes his risk onto the management teams he is investing into. No quite, but I think you get what I am saying here.
Anyway, moving along, here are some points and stock picks for 2017 that should hopefully serve you well.
Tools to Help You in 2017 (and beyond):
What should investors do when they have no idea? Diversify.
Diversification is not as exciting as betting on black or red in the casino, but it is a process of trying to tip the odds in your favour (unlike betting on black or red). But, there is also a trick to diversifying: don’t over-diversify and never buy an investment purely as a diversification exercise.
Nope. Rather, hold as few uncorrelated investments as possible, but make sure that each investment can stand on its own as an excellent investment. How many is a few? That depends on you, your risk profile and what market you are playing in, but make sure that you are at least comfortable if you get one completely wrong (I like 15 to 20 stocks in the local market).
Read my more detailed thoughts here: A Forgotten Safeguard: Diversification.
Leading from the point made above about each investment standing on its own as a good investment, consider quality as a benchmark.
Times are tough, economies are chaotic and politics is, well, politics. Thus, these are the times when there is a very real chance that a business will fail. Likewise, amidst all this turmoil, there are vast fortunes to be made if you are nimble enough, well positioned or both.
Businesses are not all the same quality. Thus, a good quality business should fail last and grow first when compared to a rubbish business.
Make sense? Logical? I hope so.
Finally, look beyond the noise of the economies, the hype of the share prices and the pressure of moment by moment, to consider what is the value of the underlying business? If you know this, you can separate the chaff from the wheat and weight the odds even more in your favour by investing into shares that are mispriced.
For a background to the fundamentals of a business, see here: The Four Pillars of Company Fundamentals. If you get through that, consider working through some webinars specifically on valuing shares: Company Valuation Basics.
In summary, the tools to help you deal with the potential chaos of 2017 are the same tools you should be using all the time without exception in managing your small cap investments: buy good companies, try to under pay for them and build and maintain a diversified portfolio.
Simple. After all, you can only “Worry About What You Can Control“.
Stocks Worth Looking at for 2017 (and beyond):
OK, so the above’s list of tools should be great for pretty much any investment or market environment.
But what do you actually invest in?
Here are some stocks that I like and dislike (and many of them that I hold in my Small Cap Fund):
Consolidated Infrastructure Group (CIL) stands out head-and-shoulders as both a great group, good management and a rather ridiculously cheap share price. Read more about it over here: Consolidated Infrastructure Group: Still Quality & Growth for Value.
While CIL looks like the cheapest stock on the market to me, pretty much the majority of the domestic retail and retail-related (i.e. retail REIT) sectors looks dangerous! The same operating and financial leverage that has given them the last decade or two of growth could go the other way over the next six to twelve to twenty-four months…
Likewise, 2015/16 (and perhaps even 2017) has seen a swathe of investment holding and private equity companies list on the JSE (along with some SPACs). Most of these will probably turn out to be bad investments (if they have not done so already), but there may be one or two diamonds in here.
Read my thoughts on Astoria here (What Astoria’s Discount Should Be) and apply the same technique across the sector and its various heterogeneous structures.
Another two stocks to consider is Rolfes (RLF) and CSG Holdings (CSG). Personally, I think Rolfes is “Worth Over 500cps” while CSG Holdings has the makings of an early-stage Industrial Services Group.
Both I think are well-managed, under-valued and should show good growth over the next five to ten years.
In closing, there are some eternally useful investment tools that I have noted above and some current small cap dogs and diamonds. Hopefully this is useful to you. More importantly, though, I want to thank you for your support in 2016 and look forward to sharing more with you on SmallCaps.co.za in 2017.