Why You Should Be Adding Microcap Stocks to Your Portfolio

Last year I had the pleasure of attending the Australian Microcap Investment Conference (AMIC), in Melbourne. Now I must admit that I’m not one to normally attend investment seminars. It may surprise you to hear me say this given I myself am an investment expert however I tend to find most seminars and workshops of this nature are run by people who are generally only interested in emptying your pockets rather than providing useful and actionable investing information.

The AMIC is different as you are provided with a rare opportunity to get up close and personal with the men and women who are charged with running some of the smaller companies on the ASX by market capitalization. Sure – such people still have a vested interest in promoting their companies in order to have you invest but it’s rare to have such a close insight into the detailed financial information of these companies and if you have some basic investing knowledge you can quickly dismiss a poor investment from a good one.

Whilst attending last year’s workshop I took note of several companies that I believed presented good investment opportunities and knowing that some of these companies may have representatives return for this year’s AMIC (to be held in October again this year – click here if you would like to attend) I thought it a good idea to track stock performance and see how some of these stocks have faired over the last 12 months. So let’s take a look at several of these interesting microcaps I have kept an eye on.

AMA Group Limited (ASX: AMA)

I’m a bit of a ‘car guy’ so AMA immediately jumped out at me during last year’s AMIC. AMA is positioned within the automotive accessories and aftercare market in Australia and the company also operates the smash repair franchise Mr. Gloss in Victoria as well as brake and transmission remanufacturing businesses Perth Brake Parts and Fluid Drive.

Looking at the monthly chart of AMA below you will see that the share rose to an all-time high of $1.09 prior to the GFC. Price reached a low of just under $0.02 in 2009 however since this point in time the share price has grown to 1550% to $0.33 at the time of writing. Had you purchased AMA following last year’s AMA (at around $0.30) you would be up around 10%.

Looking at future movement, AMA recently retraced 38.2% of the range from the low in 2009 to the high in Feb 2013 and this month has confirmed June as a major low. This is a positive sign as according to famed analyst and trader W.D Gann, a retracement of less than 50% of a major range signals strength.  Resistance is apparent around $0.38 however if the strength of the current move continues we are likely to see the high of February 2013 broken in coming months.


Emerchants Limited (ASX: EML)

It never ceases to amaze me just how much technology continues to evolve and in general make our lives easier. This also extends to business. Running a small/medium sized business myself I am always looking at ways to leverage mine and my employee’s time and where possible implementing automated systems to make everyone’s life a little bit easier. Emerchants share this view and have developed custom technology using reloadable and non-reloadable pre-paid debit cards to make payments and expenses much easier to disburse.

Technically, EML has been a wild ride for investors and overall the stock is largely illiquid. For example, take a look at the chart below and you will notice the large gap between the closing price of June 2011 and opening of July 2011, with the stock jumping from around $0.17 to around $0.74. Exiting at this point would have been a wise move as the stock soon tumbled from this point, reaching a low in 2012 of $0.05. This just goes to show that although there can be some great profits to be had with Microcap stocks however you must employ strict risk and money management rules. Since the last AMIC, EML is up 240% as of the time of writing. Importantly, EML broke through a strong barrier of resistance in May and with the current month showing strength based on the closing price, it’s likely EML will continue to trade upwards with my next price targets at $0.40 and $0.50 respectively.


Jumbo Interactive Limited  (ASX: JIN)

I’m not a betting man – to be honest the whole idea of gambling bores me to tears, but I’m always keen to invest in companies related to the gambling. The gambling industry turns over billions of dollars a year worldwide so companies that can position themselves in the right way and secure are large chunk of this industry are a wise investment in my book. One such company is Jumbo Interactive that was launched just before the turn of the century by Mike Veverka. Some may recognize Veverka as he was also the founder of Squirrel Internet, one of the first internet service providers in Australia.

Jumbo Interactive oversees a number of online lottery businesses including ozlotteries.com that provides the same types of lottery tickets that you buy at the local shops. Jumbo has solid cash flows and is currently working on expansion opportunities in new markets including the lucrative US market.

From lofty heights of the tech boom where Jumbo reach an all-time high of $6.40 in January 2000, it was pretty somber for the company for most of the decade that followed, albeit a short spurt in 2005/2006 where the company rose to trade around $1.00 from lows of $0.10. Since 2011 however Jumbo has taken off as the company added new products to its line-up and expanded into overseas markets. Jumbo has continued to make higher lows and highs confirming an upward trend for the better part of two years now.

The stock recently retraced 61.8% of the range from 2008 to the more recennt high in February. Based on July’s performance, it looks as though the uptrend will continue although I would caution investors on the possibility of resistance around $2.20/$2.30 which is the 50% mark of the range from February 2013 to June 2013. Jumbo is up around 17% since the Microcap conference last October.


Maxitrans Industries Limited (ASX: MXI)

Maxitrans caught my last year due to the solid uptrend the stock was, at that time travelling. From the 2011 low, Maxitrans had risen over 400% to the October 2012 close and at the time it looked set to continue. Maxitrans Industries is Australiasia’s leading supplier of road transport equipment and supplies products through a number of leading brands. The company also has dealings in repair and service support to the transport industry.

The company recorded a new all-time high in February of this year, swiftly surpassing the previous all-time high of $1.08 of 2004. The stock peaked at a high of $1.55 in the following month (March) and has since retraced to a major support level around $0.85. Interestingly this is also the 50% level of the range from the low in 2011 to the recent March high. Maxitrans lifted strongly in July. At the time of writing the company is trading at around $1.30, breaking strongly through the 50% mark of the recent down range and looks set to challenge the recent all-time high. MXI is up over 30% from AMIC 2012.


Vocus Communications Limited (ASX: VOC)

Vocus is unique in the sense that it’s primary asset is a global telecommunications network it created that connect Australia and New Zealand to the global internet network in the United States.

VOC broke from a pennant pattern in April of this year, the consolidation forming the pennant pattern took the best part of a year to unfold and I am sure this movement would have frustrated many investors, particularly with the likes of Telstra and TPG absolutely flying at the same time.

The company rose quickly from the pattern peaking at $2.48 in May of this year.  Unfortunately the close of the month was well and truly on the lower third of the month’s range signaling weakness and a likely pull back in the following period. VOC has since pulled back to support at around $2.00.

I would not be surprised if VOC had further to pull back as the current price action suggests weakness. Generally, once a stock breaks from a pattern it is quite common for price to move back towards the halfway point of the pattern to test support before rising again. As such I would be expecting VOC to continue the current pull back to around $1.70/$1.80. VOC is up around 18% since October of last year.


Vita Group Limited (ASX: VTG)

I have to admit – I’m a huge Apple fan. Most of the technology I own is Apple from my laptop right through to my ipod. So it comes as no surprise that VTG is on my watch list as the company owns one of the major retailers of Apple products, Next Byte. VTG also owns other brands such as Telstra Business stores, Fone Zone and many others.

Since the all-time low in 2009, VTG has performed strongly rising from a low of $0.06 to the July 2013 close of $0.635. That’s close to 1000% growth in just over four years, a great performance in anyone’s book although during this time the stock travelled largely sideways between mid-2009 to mid-2012. Nevertheless, this is a great performance in a somewhat glum retail environment in Australia during this time.

VTG pulled back slightly this month as can be seen on the monthly chart below. This is not surprising given the prior two months showed weak closing prices suggestive of buyers taking profits. There is a level of natural support around $0.55, just below current price action and a potential trend line could also provide support.

I would be cautious with making a purchase right now – not only because of the weakness discussed above but also due to the stock closing in on the 50% ($0.72) level of the range from the all-time to the all-time low which as W.D Gann identified is a powerful support resistance for any stock.


How much should I invest in Microcaps?

Make no mistake, Microcap stocks hold a much higher degree of risk than blue chip stocks due to tiny market capitalization, low liquidity and high volatility. As such, when investing in Microcaps it’s wise to only utilize capital that you can afford to, or feel comfortable losing if things turn against you. Yes, huge profits can be had with only a tiny investment in such companies but you can also lose your shirt if you don’t implement appropriate risk and money management.  Once again, if you would like to attend this year’s Microcap Investment Conference, click here. I’ll be walking around at this year’s conference, looking for those companies that take my fancy so be sure to come up and say hi.

To your profitable trading,

Dale Gillham
Chief Analyst
Wealth Within