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Finding Hidden Gems from Small Cap Stocks

A company with a market capitalisation of less than S$100 million can be considered as a small cap stock. Typically, investors view small caps as stocks that possess more growth opportunities, though the investing risks involved can be higher than those of more established companies.

Most of the companies listed in Singapore fall into the small cap space. Through the StockFacts stock screener provided by bourse operator Singapore Exchange, I found that there are at least 405 listed entities in the database – out of more than 700 names in total – which have a market capitalisation of less than S$100 million.

So, which small cap stock may be a potential investing opportunity? Let’s take a look.

For the dividend investor

The small cap universe can be a nice place for investors who are on the lookout for high dividend yields. Some small cap stocks tend to distribute sizeable amount of dividends in an attempt to attract investors.

The following companies have tasty dividend yields of more than 9.5%: CDW Holding Limited  (SGX: D38)Karin Technology Holdings Ltd  (SGX: K29)Soon Lian Holdings Limited  (SGX: 5MD).

Company Dividend Yield
CDW 10.3%
Karin Technology 9.5%
Soon Lian 17.5%

Source: S&P Capital IQ

For the deep value investor

Investors who prefer stocks with really low valuations may also find themselves at home in the small cap universe.

In this space – possibly due to investor neglect – there are companies with price-to-earnings (PE) ratios of as low as 1. For an inkling of how low that is, consider that the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index  (SGX: ^STI) – is selling for around 11.4 times its trailing earnings.

Some examples of small cap stocks with low PE ratios include United Food Holdings Limited (SGX: AZR) and Triyards Holdings Ltd (SGX: RC5).

Company PE ratio
United Food 2.4
Triyards 2.8

Source: S&P Capital IQ

For the growth investor

Given that small caps are well, small companies, it only makes sense that there are fast-growing firms in the space which can satisfy the growth investor.

Some fast-growing small caps with revenue growth of more than 25% over the past five years include Mencast Holdings Ltd (SGX: 5NF)TEE Land Ltd (SGX: S9B) and BBR Holdings (S) Ltd (SGX: KJ5).

Company Annualised revenue growth over past five years
Mencast 32.1%
TEE Land 37.6%
BBR 27.5%

Source: S&P Capital IQ

For all Fools (capital ‘F’!)

It should be noted that all the stocks I’ve mentioned above are not necessarily good investments.

Let’s use the dividend examples. In our current low interest rate environment, the yield offered by the three aforementioned stocks are really attractive. But, we have to be aware that a stock’s dividends (or a trust’s distributions) can be cut if its underlying business worsens. Finding which stocks have high yields should only be the starting point for your research – our job as investors is to investigate whether a stock’s dividends are sustainable or not.

The same logic actually applies regardless of what metrics we are looking at. A low PE ratio, a high dividend yield, or a high revenue growth rate should be taken only as an initial sign that this stock is worth a deeper look. Such metrics should never be the deciding factor when we want to make an investing decision.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own shares in any of the companies mentioned above.