Small Caps: 'slow horses' no more

All hail Gary Oldman!

Don’t know the name?

He’s a famous British actor that’s appeared in the ‘Dark Knight’ Batman trilogy. Oldman also won an Oscar for his portrayal of Winston Churchill a few years ago.

But it’s his TV show Slow Horses that I’m loving right now.

He plays a character called Jackson Lamb. He’s a hard-drinking, chain-smoking and washed-up old spy.

He’s a right geezer, as the Brits say.

Lamb runs an outfit of agents for Mi5 from a building called Slough House. Except his team aren’t the crack troops of the British Secret Service. They’re the duds that stuffed up their careers and are sent to Slough House to shuffle papers, make tea and keep out of the way.

In other words, they’re out of the hot action. Lamb calls them his ‘Slow Horses’.

But let me tell you something…

I’m the small-cap specialist for Fat Tail Investment Research. Between mid 2021 and the end of 2023, shares in the small-cap sector were the ‘slow horses’ of the ASX. They got dumped for being too risky, too underfunded, too cash flow negative and a macro-outlook that seemed all too hard.

They went into their own ASX version of Slough House…underperforming ASX blue chips badly.

However…

Jackson Lamb might say every ‘Dog’ has his day. (Agents in the show are called Dogs.)

I can tell you…

Small caps are having their day, right now, and then some.

Just this week we’ve seen two small cap stocks announce takeover proposals.

MMA Offshore (ASX: MRM) is one of them. It’s also one of my recommendations. It’s now up 97% since August last year.

The other takeover target is a real estate agency called McGrath Real Estate (ASX: MEA). It’s now up about 40% since early February.

That’s a funny one. I first wrote about MEA in 2015. 

I had it on my list of stocks to go over. My thinking was that property is due a comeback and MEA was still on the floor, price wise. Perhaps there was value there?

I never had a chance to get to it…too many other ideas seemed more urgent.

And now another company is going to swallow it up and delist it.

You can’t get them all.

But it doesn’t stop there.

In December last year I recommended a stock called Virgin Money UK (ASX: VUK). I’d followed that one from 2016.

VUK got a takeover offer this month too.

My readers made a tidy 30% in three months. To be honest, I’d have preferred for VUK to stay trading on the market. Over time, I expected it to do much better than 30%.

These are just three examples I have a connection to. There have been others.

(Of course, not all my recommendations perform like this. And these stocks all sit in the riskiest and most volatile sector of the share market.)

Why are all these takeovers happening now?

Small-cap shares are cheap!

They don’t belong in the ASX version of Slough House. (Well, most of them, anyway.)

Bigger companies are swallowing up these assets while they’re marked down from the bear market over the last few years.

That means you, as a potential small-cap investor, should be considering the same thing.

Now, I don’t expect you to be able to suddenly download a list of hot potential ASX small caps. Then sift through them like an Mi5 agent with the latest supercomputer.

That’s why I do the work for you.

There are different ways of playing this small-cap resurgence.

One is to look into potential takeover targets. You can see I’ve got two from the recent batch.

Another is to look into companies run by successful people.

Telecommunications firm Tuas (ASX: TUA) has been my favourite idea here for a long time. It’s up 220% since I first recommended it this time last year.

A third way to play the small cap space is to look into shares that have a connection to the hottest theme in the world – artificial intelligence. Yes, small caps and AI go hand in hand…if you know where to look.

Make sure to sign up to Fat Tail Daily for more on this. 

And check out ‘Slow Horses’ the show. You won’t regret it.