Given the standout performance of small companies in 2010, it is worth asking one of the sectors most consistent fund managers about the minnows that have the potential to surprise in 2011 and beyond.
Paul Hannan, who co-manages BT Investment Managements Wholesale Microcap Opportunities Fund, has helped maintain the funds top spot in financial data house Morningstars Australia Mid/Small Blend category over three years.
The fund gained 27 per cent in the 12 months to the end of November 2010, according to Morningstars performance statistics. Advertisement: Story continues below
The funds remit is to locate small listed stocks that have yet to fulfil their potential. In most cases they are either mispriced by the market or simply under-researched by the big investment bank analysts. Smaller companies experts sometimes carve their careers from bank analysts blindness, who tend to ignore any company capitalised at under $500 million.
Hannan has chosen two shares he believes should do better than the market in the short to medium term. He has punted on Ludowici, a mining services company with a capitalisation of about $100 million, and RCG Corporation, a $140 million investment company with a foot in the retail world. Both shares are well outside the ASX top 300 listed shares.
Ludowici was once a family concern with a long history in the primary and secondary industries and has been listed since 1911. Hannan says new management, which took over about two years ago, has transformed it into a mini technological powerhouse.
Ludowici specialises in screening and grading processes for gold, iron ore, copper and coal, which include vibrating screens, centrifuges, cyclones and density separation techniques. Its reflux classifier, which finely separates coal and other ore types, is now considered the most effective method of refining ore in the world.
The companys technologies are coming to the fore at just about the right time in the resources boom, Hannan says. But its still a genuinely undervalued mining services company.
Hannan says the company retains a positive cash flow and very little debt. What debt it does have is well covered by its property holdings.
Prospective earnings per share will be about 46 cents in the 2011 financial year, around the 10 per cent mark. All the same, it has not been completely under the radar and lately some investors have seen its potential. The shares are now trading at about $5, having already risen about 75 per cent in 2010.
The company will pay a dividend of 21 cents this year, which represents a yield of about 5 per cent. Despite the recent share price spike, Hannan says it remains at a discount to the market.
This company is at the right place in the commodities market and will be well placed to add value to coal, copper, gold and iron ore exports, he says.
LDW Price at posting:
$4.91 Sentiment: Buy Disclosure: Held
