Mid & Small Caps Outperform In 2016

One of the quirks of the Australian stock market this year was the rediscovery by a lot of investors of the “other” stock market – the one outside the S&P/ASX 100.

Even the one outside the S&P/ASX 200.

Australia’s is one of the most concentrated stock markets in the world, with the ten largest stocks by market capitalisation accounting for 44% of the market’s total value. These ten drive the major indices, which is why the major indices have a similar look about them in the following table of performance (which includes dividends.)

But what stands out from the table is the outperformance that has come from the MidCap 50 – which is comprised of the members of the S&P/ASX 100 that rank 51 to 100 in terms of market value – and the Emerging Companies Index, which covers Australia’s best ‘microcap’ stocks. This index consists of 200 Australian microcap companies ranked between 350 to 600 by capitalisation, that meet reasonable liquidity tests.

Over the last 12 months, fund managers have been tempted out from the safety of the top 20 stocks, looking for alpha (out-performance of the S&P/ASX 200). Even retail investors have followed the strategy of buying the big-cap stocks for yield – think the big four banks, Telstra and Wesfarmers – but looking more into the mid-caps, small-caps and even micro-caps for growth.

So far in 2016, only half of the Top 20 stocks show a price gain at all. And if you wanted double-digit capital growth, only Fortescue Metals (+230%), BHP (up 43%) and Rio Tinto (+35%) have delivered.

No wonder investors have looked outside the market’s heavyweights.

That’s certainly what I do when writing (most weeks) on a stock – I scour the small-caps and micro-caps looking for a good story: a stock that has potential. Then I explain why.

Assessing the price performance of these picks at the end of the year always causes some trepidation, but like any stock-picker, I’m helped by the fact that in the picks you get right, your potential gain is not limited, whereas your losses are limited. And if you annualise the gains, that imbalance runs even more in your favour.

So for the record, of the 32 stocks I wrote about this year, 13 rose in price, 17 fell, and two are unchanged.

The average raw price gain is 4.6 per cent. But the average annualised gain is 160.1 per cent.

There have been some dire performances, such as juice and health food company Food Revolution Group (May 13), which is down 59 per cent over 216 days, equal to an annual loss of 77.8 per cent. Medical device developer Adherium (July 29) has lost 36.4 per cent over 139 days, for an equivalent annual fall of 69.5 per cent. Payments fintech Mint Payments (November 18) has dropped by 19.5 per cent in 27 days, on track to lose 94.7 per cent over a year if that continues. Even worse is marine safety technology developer Shark Mitigation Systems – just last week – which is down 8.8 per cent already, or minus 99.6 per cent annualised.

Ouch.

But the leverage of gains over short periods, when annualised, is remarkable.

Medical device maker Uscom, from December 2, is up 11.3 per cent in 13 days, which equates to annualised growth of 1,953 per cent. Drone security technology company Droneshield (November 26) has risen by 16.7 per cent in 19 days, for an annualised rate of 1,832 per cent. Human gut biotechnology company Medlab Clinical (September 2) is up 124.3 per cent in raw terms, over 104 days, for an annualised gain of 1,605 per cent. That kind of movement can bring up a tipster’s batting average very quickly.

Here’s looking forward to an enjoyable Christmas break, and more digging through the market in 2017, looking for similar gems – and trying to avoid the duds (most of which I still like for the long term!)