Derek Pain: Perversely, many small caps are still left out in the cold

No pain, no gain

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The Independent Online

Earlier this year there were high hopes that the persecution of small caps was coming to an end. There was a sudden outbreak of enthusiasm and the stock market undercard looked more lively than it had for a long time.

But it was a fleeting illusion. The FTSE AIM share index has lost, together with the Footsie, all the ground gained in the opening months and is looking decidedly uncertain. So once again most small caps are unloved and unwanted. True, some resource companies, plus a few high tech and pharmaceutical creations, still achieve investment followings but they are relatively few and far between. And they are often highly speculative, with hits dwarfed by misses. Whether successful or not, many have an insatiable appetite for investors’ cash.

What I would regard as more traditional small caps – one stockbroker describes them as “real companies” – often remain, unlike blue chips, an uncomfortable distance from the levels achieved some years ago. The performance of two former constituents of the no pain, no gain portfolio help illustrate the decline of what were once considered good long term investments. Shares in Goals Soccer Centres and Prezzo were high flyers before the financial crash sent many investors scurrying to what they perceive to be the safer havens offered by blue chips. In those not-so-far-off days there was far more patience and tolerance than nowadays.

Up-and-coming businesses were then given time to grow; nobody expected breathtaking expansion, with the order of the day being steady progress built on solid foundations. In other words, shareholders big and small were much more inclined to take a long-term view.

Goals, running five-a-side football centres, joined the portfolio in May 2005 at 125.5p. The shares subsequently topped 400p with the portfolio selling at 300p. Since then profits have risen – perhaps not as quickly as I expected – and a potential bidder hovers. Yet the price is a mere 130p.

Prezzo’s involvement dates back to November 2003. The portfolio paid the equivalent of 17.25p. The shares went on to top 90p, with the portfolio disengaging at 60p.

Although the restaurant chain has made progress since the portfolio departed, the shares, after slumping to 20p, have reached only 68p. I believe they should, like Goals, enjoy a rather more heady valuation. Both were sold around Christmas 2007.

Of course, not all traditional small caps are envious of past levels. The portfolio can point to Avation and Hargreaves Services. And Booker, now capitalised at around £1.2bn, was in the small-cap category when the portfolio arrived.

The disenchantment with small caps is shown by the FTSE AIM share index. In the madcap dotcom euphoria at the turn of the century it approached 3,000 points. Only five years ago the reading was above 1,200. As I write it is 724.

The difficulties of Plus, which is likely to close, are another indicator. At one time small cap shares tended to overshadow the more pedestrian blue chips. Not any more. Low interest rates have helped drag sympathy away. Many undercard players do not pay dividends but the vast majority of companies with substantial capitalisations are on the dividend list. Some offer yields of 4 or even 5 per cent, which are attractive when viewed against the pathetic high street offerings. In addition the element of risk is much lower, despite the continuing plight of the euro, when a company has a capitalisation of, say, £1bn.

SnackTime, the vending group, is one small-cap that has been treated harshly. True, it has produced a rather downbeat trading statement but it had already warned that expected profits of £1.4m would not materialise. Still, it suggested it was well placed to compete and was confident about current year prospects. The shares, at one time approaching 200p, promptly fell 5.5p to a 39.5p low. There may be a big seller in the wings, for on the day of the trading announcement the only deal was a buy of 584 shares at 40.5p.

The portfolio alighted on Snack- Time at 119p. The fall has been disconcerting but I have resisted the temptation to sell. I think the present value demonstrates the stock market’s unhinged attitude to small caps and it could be worthwhile to hang on - at least for the time being.

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