Just two trading days into the New Year and things don’t look so good.
Usually a new year brings all kinds of hope and optimism. Not so much for the Aussie market. It still looks shaky at best. Heck, Dick Smith Electronics is in voluntary administration just two trading days into the New Year.
Not exactly how most people were hoping things would start. But I think most people are suffering from short term memory loss.
Many were hoping for the so called ‘Santa rally’ at the end of 2015. It never came.
What’s next? The New Year. Ahh, there must be something good to start a new year. Nope, nothing there either. It’s the same old market as it was in 2015.
It’s business as usual. And you should get used to it. I think it will be the same kind of market for at least the next five years. It will take at least that long for Australia to develop some kind of long term economic plan to recover from the end of the commodities boom.
This all means more uncertainty and difficulty for investors.
There’s just not much to get excited about…or is there?
It’s good news for stock pickers
According to reports in The Age, The Financial Review and the Sydney Morning Herald, 2016 is the year for stock pickers.
The Sydney Morning Herald writes,
‘David Bryant [Australian Unity chief investment officer] is calling another bad year for resources stocks after an annus horribilis for the big miners after the slide in iron ore and oil prices.
‘“There’s just no reason to think you’ll get anything from resources this year,” Mr Bryant said.
‘The banks were also in for another tough year, he said.
‘“The combination of additional capital controls, APRA wanting to limit housing lending, bad debts at record lows, interest rates at record lows, it’s really hard to see how it’s going to grow much in the next year.”
‘Outside of those two sectors, another quarter of the market was under pressure, he said. Another 30 per cent to 35 per cent would maintain dividends but record ‘lacklustre earnings growth.
‘“That leaves about 35 per cent of the market to work with to generate a return.”
‘That meant 2016 would be a market for stock pickers, not indexing, he said.
‘“Your strategy for the market should be to move into and out of the market as it moves around,” he said.’
We’ve been saying this for a while. It’s actually no great surprise. If you want to find big returns in this market you need to look outside of the ASX 200. You need to look for individual stocks that can deliver returns like 575%, 534%, 187%, 152% or 137%.
I use these specific numbers because in my advisory service, Australian Small Cap Investigator, our top five stocks made those exact gains in 2015.
It’s proof that even in a dire looking market you can make exceptional returns. You’ve just got to know where to look. And in my view that’s the small-cap sector of the ASX.
Stock pickers play in the small-cap market
In a market full of shocks, drama and uncertainty it’s the small end of the market where companies can take off overnight. Take for instance Netcomm Wireless [ASX:NTC] on 17 November 2015 the stock was trading at $1.68.
It was market knowledge that the company had tendered a bid to supply hardware to a new rural broadband rollout in the US. The announcement of success was imminent.
As it turns out Netcomm won the contract and will now supply ‘one of the two largest USA based telecommunications carriers’ with their rural broadband hardware.
This announcement alone helped the stock to climb to over $3.50 in just six days of trading. That’s 124% gain in just six days! Now where have you ever seen action like that in the ASX 200?
Many of these small cap companies can deliver returns that turn them into ASX 200 companies. You no doubt will have heard of the meteoric rise of Blackmores [ASX:BKL] and Bellamy’s Australia [ASX:BAL] in 2015. Both of these companies delivered hundreds of percent gains to investors in 2015.
Now they both exist well inside the ASX 200. But they were both small cap companies before they made it into the big end of town. Being in the ASX 200 is a great achievement — but if you’re looking for triple digit gains, for life changing returns, then Blackmores and Bellamy’s aren’t the right kinds of stocks for 2016.
It’s too late when you go from small-cap to large-cap
Let’s look at Blackmores.
It now has a market cap of $3.59 billion. If it rises another 527% this year the stock will be worth $22.5 billion. That makes it almost as big as Woodside Petroleum [ASX:WPL]. It would be the twelfth biggest company on the ASX.
The chances of that happening are highly unlikely. Sure the stock might eek out solid single and maybe even double digit gains from here. But that’s not life changing returns. That’s not the 527% it’s risen in last 12 months.
If want really big gains, then a stock like Blackmores simply isn’t going to deliver them in 2016.
The time to invest in Blackmores or Bellamy’s or Netcomm was at the start of 2015. Now it’s too late for those huge gains.
However, there is something to get excited about. The start of 2016 brings plenty of similar opportunities. Opportunities that could do the exact same thing.
While the top 20, 100, 200 stocks on the ASX will battle along, it’s the rest you want to look at. There are over 2,000 stocks on the ASX, and most of them are small-cap stocks. It’s one of the most exciting and risky areas of the market to play in.
But if you can stomach the risk and are looking for big returns, then it just might be the perfect area of the market for you.