Derek Pain: 'Undercard' shares suffer neglect but they can make a comeback

No Pain, No Gain

Small caps have become the great unloved. In the past few years they have endured a torrid time as investor neglect has become increasingly apparent. It is, perhaps, not surprising that in these difficult days attention is largely directed at what are perceived to be the far safer havens provided by large, well-established companies.

Dividends, with interest rates at an unprecedented low, are another factor, with some blue-chips offering yields that put the high street banks and building societies to shame.

Although some small caps are on the dividend list – indeed a few, like Printing.com, offer remarkably high returns – many prefer to plough profits back into the business, relying on capital appreciation to keep shareholders happy.

Unfortunately, the chances of any realistic upsurge in a tiddler's share price are far from outstanding. The lack of investor interest means stock market dealing is often pathetically thin – for some shares non -existent for days.

It is not surprising that more companies are questioning the value of a share quote – full listing, AIM and even Plus – and, with the cost of a market presence such a heavy burden, there is a growing tendency to delist. After all, undervalued, rarely traded shares offer a business little chance of tapping the market to raise expansion capital or mount takeover bids. Indeed, an unresponsive share price could leave a company vulnerable to a corporate strike.

The banking crisis, which took share indices to uncomfortably low levels in 2009, and then the current, not entirely unrelated euro debacle, have undoubtedly been more severe on small caps than on major stock-market constituents. I don't see any short-term solution, but I am convinced small caps will eventually recapture past glories.

The success of small companies, with an often entrepreneurial spirit, is vital to the overall business landscape and even in tough conditions many of them are able to prosper.

The trouble is that the stock market, in its present blinkered and evasive state, is refusing to accept the merits of small caps and accord them the dignity they deserve. There must be a remote danger that the undercard could become so thinly inhabited that small caps are regarded as an endangered species. I do not believe such a bleak possibility will occur. But the City must be on its guard.

The no pain, no gain portfolio has suffered from the fallout. In the past it has reaped rewards from its devotion to what is now an unhappy breed. However, I intend to retain a strong undercard presence, anticipating its return as an exciting force. I suppose in the present climate it is mainly exploration stocks that occasionally hit the jackpot, although many will go nowhere. I am not enamoured by the run-of-the-mill range of mining and resource shares on offer. Many just soak up investors' cash.

Perhaps the portfolio's heavily loss-making excursion into oil exploration and its involvement with Nighthawk Energy is still uppermost in my mind.

Still, I have not completely ignored the sector, last year alighting on Northern Petroleum.

Nighthawk, which under previous management indulged in a series of cash-raising private placings, is again on the money trail, but this time all shareholders have a chance to subscribe. The issue price is 2.5p a share, not far from the current stock market quote, but a long way from the 107p once reached.

When the portfolio descended on Booker, the current star performer, it was, admittedly, a fair-sized company but still very much an undercard player.

Last week Booker, now enjoying a £1bn-plus capitalisation, produced another impressive trading statement. The shares promptly fell. Probably the reaction was related to the mighty Tesco's shock revelation that it had endured far from impressive trading.

Both announcements appeared on the same day.

Still, as I write, Booker shares have overcome the Tesco influence. They deserved to as the cash-and-carry chain enjoyed a 7 per cent sales increase in the final quarter of last year with fruit and vegetable turnover up a healthy 17 per cent.

Chief executive Charles Wilson said: "Our plans to focus, drive and broaden the group are on track."

Besides continuing its cautious Indian expansion, the group is also stepping up its service to its larger food customers.

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