Small (Cap) Wonders – Why Small is Beautiful?

For the past few weeks, we have seen a steady accumulation of small-caps – stocks with market value of less than US$150m. I do believe that this is a sign that local money is flowing back into the market. Locals – or “tsupitero” in the vernacular would usually trade stocks that are priced below P2.0 per share. The timing is perfect and I do think that investors should ride the tide and start investing in these stocks.

So why am I positive on small caps? Here are my arguments:

1.) Big-caps and second liner stocks have significantly risen in value for the past 3 years. Thus, small-caps look cheap in terms of relative price appreciation. Note that proxy stocks like PLDT (TEL – US$43.90), Petron (PCOR – P4.05) and Megaworld (MEG – P1.84) rose at least 5-folds during the said period.

2.) Profits from the big caps and second liner stocks will likely flow to small-caps. This has always been the pattern. After small caps, my next bet is for investors to chase the “basura” or garbage stocks.

3.) A lot of small caps are still trading at “crisis” prices. This means that share prices still reflect bankruptcy risks that should already be out of the equation.

So what stocks to buy? Here is the list of my small cap wonders:

1.) Kuok Philippine Properties (KPP – P0.28) – KPP is an asset play that investors have ignored. Its 40% stake in Edsa Property Holdings (EPHI – P1.24) is worth roughly P3.0bn or P.88 per share. Excluding its other liabilities, KPP should be trading at P.60 per share.

2.) Benpres (BPC – P1.28) – BPC is definitely a recovery play. First, the P/$ rate is expected to appreciate to P48 to US$1.0. This should add at least P.40/share to its current NAV estimate of P1.24/share. Second, BPC is looking to sell its 49% stake in First Philippine Infrastructure Dev’t Corp. (FPIDC). The company is expected to realize at least P5bn gain from the deal.

Please check my past post on BPC - http://bigbigtrade.blogspot.com/2006/07/benpres-bpc-p112-bet-whats-brewing-sir.html

3.) Republic Cement (RCM – P1.48) – I have said enough about the stock. Please check my past post: http://bigbigtrade.blogspot.com/2006/05/why-i-bought-republic-cement-rcm-p124.html . Simply put, it’s a matter time before this stock trades at par with Holcim (HLCM – P4.90).

4.) Ionics (ION – P1.98) – Please check my past post: http://bigbigtrade.blogspot.com/2006/06/ionics-ion-p216-looks-to-turnaround.html. The stock is a turnaround story waiting to be discovered.