Can small stocks deliver big returns?

By Trevor Hoey. Published at May 5, 2017, in Features

As the S&P/ASX All Ordinaries index slipped below 5909 points on Thursday it implied a negative one month return with the intraday low of 5885 points and the close of 5904 points disappointing investors who have been actively buying over the last four weeks, pushing the index to a post-GFC nine year high of 5983 points.

While some analysts are tipping further downside for the index it remains a stock picker’s market as evidenced by the strong performances of several stocks featured on finfeed.com over the last month.

The top five have not only bucked the negative performance of the All Ordinaries index, they have all delivered double-digit share price gains ranging between 14.2% and 66.6%.

It should be noted that share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering each stock mentioned in this article should seek independent financial advice.

Even small stocks can deliver big returns

The fact that the best performing stock featured by Finfeed.com for the four weeks to May 3, 2017 only has a market capitalisation of $8 million indicates that size doesn’t necessarily count.

Capital Mining (ASX: CMY) was the top performer with a gain of 66.6%, closely followed by Immuron (ASX: IMC), up 61% over the last month. These are emerging stocks with strong news flow driving their share prices higher and there is nothing to stand in the way of them going further as most are on the verge of hitting important milestones.

Finfeed highlights the achievements of the top five performers below while also casting an eye to the future in terms of identifying potential share price catalysts.

Capital Mining (+66.6%)

It was in March that CMY’s shares started to gain momentum after the company negotiated an option agreement to acquire the Scotia cobalt-nickel project in the Eastern goldfields of Western Australia.

CMY subsequently exercised its option to acquire the project on April 20 while also increasing its equity interest in the high grade Mayfield zinc-silver project located in south-eastern New South Wales.

Exploration results from both projects have been encouraging, and these developments along with the return of high-grade assay results from the group’s first phase exploration program at the Wolfhound lithium project in Ireland positions the company with a number of options across precious metals, base metals and new age metals such as cobalt and lithium.

In the coming three months the company is targeting first phase field work at Scotia, while also undertaking the next phase of fieldwork at the Wolfhound and Mayfield projects, initiatives which could provide further share price momentum.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Immuron (+61%)

Not only has IMC’s share price surged in the last month, it is up 130% over the last six months, having increased from 30.5 cents to Wednesday’s high of 70 cents, just eclipsing the level it briefly traded at in November 2013 after the group’s proprietary Travelan drug had been approved for marketing in Canada.

Travelan continues to provide a valuable revenue stream for IMC along with its proprietary Protectyn formula, a special form of colostrum which is the first milk from dairy cows that is naturally boosted with antibodies and other components to protect infants from diseases of the digestive system.

Combined revenue growth in the six months to December 31, 2016 was 40% compared with the previous corresponding period, primarily driven by a 157% increase in sales from the United States.

Smaller biotech stocks that have income visibility are often hard to find, suggesting that IMC as a business with predictable revenues and a promising pipeline of drugs in development could continue to gain further support.

On April 18 the company reported that its IMM-124E anti-inflammatory agent for the treatment of colitis, a chronic and often debilitating group of bowel diseases that affects millions of people, showed a significant positive effect on all levels of evaluation including clinical parameters, tissue level parameters and immunological biomarkers.

This has resulted in the progression to phase II trials, an achievement that resulted in IMC’s share price increasing from 41 cents to 70 cents in a fortnight.

While the company’s shares were sold down heavily on Thursday, this wasn’t on the back of any particular news, and it would appear to be a spate of profit-taking as some investors exited the market amid a broader downturn. Consequently, the retracement could represent a useful entry point.

Interestingly, Van Leeuwenhoeck, a research house that specialises in the biotech sector initiated coverage of IMC in February with a valuation well above that implied by its current share price.

Analyst Marcel Wijima (MSc) who in 2009 was identified by the Financial Times/Starmine as one of the top three biotech analysts in Europe, and has a Masters Degree in Financial Economics from the University of Rotterdam, has a high opinion of IMC.

While the broker’s research hasn’t been updated since the IMM-124E news, in February Wijima calculated IMC’s total value as $197 million or $1.92 per share. One would expect there could be further upside to this valuation following the transition of IMM-124E to phase II trials.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Invigor Group (+28.5%)

Invigor Group (ASX: IVO) uses its complementary suite of big data products to source, aggregate, analyse and publish content for the benefit of businesses and consumers. Its interconnected datasets enable enterprise clients including retailers, brands, shopping centres and government bodies to identify and better understand competitors, consumers, markets and demographics while providing the consumer with the best value for money.

With this breadth of product offering, IVO’s addressable market is not only massive, but it provides healthy diversification in terms of generating income from both discretionary and non-discretionary spending, both large and small businesses, and at virtually every point in the supply chain from the manufacturer to the consumer.

Last week’s announcement that the company had signed a Share Purchase Agreement for the acquisition of the Singapore-based Sprooki was understandably well received by the market triggering a share price rerating of 20% under the highest daily trading volumes recorded for the last 12 months.

As stated by IVO’s Managing Director Gary Cohen, the transaction is a potential game changer given it will position the company as the leading provider of data centric solutions to retailers as the sector continues to invest in transformation in order to grow profitably and remain competitive against new entrants such as Amazon.

Sprooki is forecast to add more than $2 million of revenue in fiscal 2018 with an additional $3 million per annum expected to be generated in revenue synergies.

Similar to IMC’s achievements in the biotech sector, a premium is normally attributed to smaller companies in the tech space that can demonstrate revenue visibility, and a more substantial rerating appears imminent with management having delivered income growth of 60% in the 12 months to December 31, 2016.

Given Sprooki won’t make a full year contribution in fiscal 2017, discussions with management focused more around organic growth which should be in the order of 30%.

With regard to predictability of income, Cohen also mentioned that contracts in Australia and overseas were generally between two years and four years, and there has been a trend towards the generation of additional revenues from ancillary services in relation to those contracts, particularly in the European region.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Respiri (+15%)

Shares in Respiri (ASX: RSH) surged more than 30% in April in response to news that its Next Generation proprietary AirSonea home monitoring device for symptoms related to asthma and Chronic Obstructive Pulmonary Disease (COPD) had received CE Mark approval.

This paves the way for partnership discussions, providing the opportunity to market and sell the AirSonea device in the European market, including the UK.

The UK is one of RSH’s initial primary target markets and Europe represents one of the three largest markets globally.

Of significance is the fact that the product was awarded a Class 11a approval, a higher level than the previous Class I approval, validating the substantial improvements and advancements made on the AirSonea device’s software and technology.

RSH is now in a position where its products have been cleared for use by the US Food and Drug Administration (FDA) body, the European Union CE and the Australian TGA, while the commencement of an approval process for Asian markets is in train.

It was in late April that management informed the market of developments in Asia, including promising opportunities in China where pollution is driving the increase in asthma, COPD and other respiratory diseases.

RSH has been in partner discussions and the group expects to receive written commercial in- confidence proposals by the end of May from at least two potential partners in China.

This could be a significant share price catalyst given China’s huge addressable market, and the fact that this could be a stepping stone for the company to expand into the broader large population Asian region where medical infrastructure in some areas struggles to keep pace with demand, makes home devices such as AirSonea all the more attractive.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Mantle Mining Corporation (+14.3%)

Mantle Mining Corporation (ASX: MNM) was another big mover with its share price spurred on by the appointment of Tammo (Tom) de Vries as Chief Executive. He has an impressive background having held senior positions with WMC Ltd, MIM Ltd and Bendigo Mining.

The focus over the last quarter has been updating the geological models for the Morning Star and Rose of Denmark gold mines located in Victoria, as well as structural reinterpretation and an historical review of the Stacpoole zone, a near surface, thick continuous reef with excellent indications of unmined high-grade gold mineralisation.

Stacpoole is now confirmed as one of the thickest reefs in the Morning Star system with a target zone of 450 metres long by 60 metres wide. While the zone has seen little prospecting since 1900, previous drill holes included 4.1 metres grading 18.8 grams per tonne gold, as well as a number of other intercepts with visible gold.

The past performance of this product is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

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