What were the key themes for small caps in 2019?
Smaller companies are often at the sharp end of positive and negative trends in the market and wider economy.
A spirit of entrepreneurship and innovation can help small caps be at the forefront of change. At the same time more modest balance sheets and less diversified revenue can leave them exposed if the backdrop turns against them.
In this article we look at some of the key themes which have emerged in the small cap space in 2019.
INNOVATION IN THE MEDIA SECTOR
Two of the standout small cap performers in the past 12 months are closely linked to the evolution of the media sector. According to a report from regulator Ofcom in September 2019, around 7.1m people in the UK listen to a podcast each week, an increase of 24% year-on-year.
Shares in podcasting platform Audioboom (BOOM:AIM) have more than doubled year-to-date to 215p. The company helps content creators host, distribute and make money out of their podcasts. On 7 October the company reported record quarterly revenue for the third quarter of $5.7m, up 86% year-on-year, though it remains loss-making for now.
Another small cap media play which has performed well is Bidstack (BIDS:AIM), up 166% since the beginning of 2019 to 13.2p despite some weakness in recent weeks. The company sells advertising within computer games such as the advertising hoardings on match simulations in popular soccer management title Football Manager.
The company has been focused on expanding its platform and team at the expense of revenue which was negligible in the six-month period to 30 September. The company agreed a strategic partnership with Japanese advertising agency Dentsu in September 2019.
Bidstack offered a reminder of the sometimes precarious nature of small caps, falling 30% as it warned it would not hit revenue targets for 2019 due to delays (18 December).
QUALITY SHINES THROUGH
In a year filled with economic gloom and political turmoil, investors haven’t had the appetite of previous years to take on risk.
But with bond yields at record lows and some of the larger cap companies giving returns normally received from bonds, stock pickers have had to look further down the scale to try to make some decent money.
That could be why high quality small companies have done well this year, with investors not willing to take on huge risk but happy to pay a premium for dependable companies that still have room to grow.
For example, the likes of soft drinks maker Nichols (NICL:AIM), pottery manufacturer Churchill China (CHH:AIM) and veterinary services firm CVS Group (CVSG:AIM) have all performed strongly this year on the back of solid growth, and have been favoured by investors due to their strong balance sheets and stable cash flows.
Small caps in general may have been somewhat out of favour with investors given the UK economy has been sluggish this year and Brexit uncertainty has taken its toll on some companies.
But the higher quality ones have proved popular, as investors are attracted to their pricing power, ability to take market share and cash generative nature which means they can fund their own expansion.
FASHION RETAIL POLARISATION
Polarisation in performance also played out among clothing retailers lower down the market cap spectrum. Although the shares ended the year in a downtrend due to more subdued first half sales growth, British premium lifestyle brand Joules (JOUL:AIM), famed for its bright wellies, continued to gain share in the high-growth premium lifestyle sector during the period in review.
Another head-turner in terms of top line momentum was online women’s fashion brand Sosandar (SOS:AIM), whose celebrity fans include Spice Girl Mel B and TV personalities Amanda Holden and Kelly Brook.
Having raised £6.9m in an oversubscribed summer placing, Sosandar’s accelerated marketing spend boosted brand awareness and analysts forecast a profit breakthrough in the year to March 2021.
It wasn’t a good year for Quiz (QUIZ:AIM), whose share price followed profits lower in 2019. The fast-fashion retailer has proved a flop since floating just two and a half years ago, hurt by the structural headwinds buffeting UK retail, cut-throat competition and the fact it has simply too many company-owned stores and loss-making department store concessions.
Capping off a mixed year for small cap apparel was the collapse into administration of Indian online fashion site Koovs (KOOV:AIM), while the difficulties endured by online international retailer MySale (MYSL:AIM) saw its shares crater in the period under review.
BINARY OUTCOMES IN BIOTECH
There has been an even more pronounced polarisation of performance in the biotechnology sector.
If you were lucky enough to find and invest in Silence Therapeutics (SLN:AIM), a firm that specialises in treatments which harness the body’s natural mechanisms within cells to target serious diseases, you would be feeling very smug.
The shares have rocketed up 662% this year after the company announced a tie-up with US biotechnology firm Mallinckrodt to commercialise its key compound called SLN500. But having the confidence to get involved in such specialised companies requires specific medical and scientific knowledge that few investors possess.
Even armed with the requisite skills, it can be tough to make the rights calls. Take cancer drug and diagnostics firm ValiRx (VAL:AIM), whose shares have lost 90% of their value this year.
The binary nature of small-cap biotechnology companies means that the sensible approach to getting exposure is to participate through a managed fund or investment trust.
Not only does the investor get access to expertise in the form of trained doctors and scientists, most funds spread their risk across many aspects of biotechnology, mitigating the impact of failures.
SMALL CAP PUNISHMENT BEATINGS
This year was also a period in which small caps in general were heavily marked down on any missteps, such as the punishment given to sneakers seller Footasylum in January after it coughed up another profit warning.
Not long after, Footasylum was put out of its misery by branded sports and casual wear giant JD Sports Fashion (JD.) in a deal that is still being pored over by the competition authorities. Elsewhere in retail, profit warnings from TheWorks.co.uk (WRKS) saw shares in the value retailer savagely sold down.
RESOURCES EXPLORATION SHUNNED BY INVESTORS
Increasingly investors seem to be shunning the resources exploration space. This is the result of several factors including volatile commodity prices, examples of poor corporate governance and dwindling funding options.
Another issue is resource nationalism where countries look to take a greater control of their hydrocarbons and minerals assets.
Perhaps the biggest reason is a poor track record for successful exploration among listed companies. There have been very few discoveries in recent years to act as a catalyst for the outsized returns investors expect from drilling success.
Even Eco Atlantic Oil & Gas (ECO:AIM), which enjoyed initial success with its partners offshore Guyana, thereby providing a potential advert for oil and gas exploration, looks set to end the year up only modestly on its levels at the start of 2019 as the oil discovered was found to be heavier and lower quality than expected.