Small stocks, big opportunity

Investors' appetite for the smaller listed stocks has not returned. Warren Jervis, sector head for small companies at Old Mutual Asset Management, says this is because many issues related to the credit crisis still worry investors.

Investors' risk appetites have waned since the credit crisis and small shares, in particular, have become unpopular. The AltX was especially massacred in 2009.

Neither does Jervis expect much of a recovery in demand for smaller stocks in 2010.

Coronation portfolio manager Alistair Lea, who is responsible for the Coronation Smaller Company Fund, says that when investors' appetite for risk is very low, smaller shares are generally mispriced.

For that reason he believes that investment opportunities exist for those who are prepared to do their homework.

In the past six months Coronation has been investing in such companies. Examples are: Distribution and Warehouse Network, Kelly Group, Omnia, York Timber and Advtech.

Lea's advice is to look for strong management teams, good business models and healthy balance sheets.

He says that one aspect that needs to be taken into account when considering small stocks is the health of their balance sheets. Small companies with too much debt often do rights issues, which dilute existing shareholders' holdings.

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