These Small Caps Look Cheaper Than Your Tracker

LONDON -- Let me start by saying that FTSE 100 (INDEX: ^FTSE  ) index trackers can be great investments for many people. Such trackers can capture the performance of the benchmark index at low cost and give an easy opportunity to enjoy the potential future power of the stock market -- without the worry of individual stock-picking.

In fact, now does not seem a bad time to back the market through an exchange-traded fund such as the HSBC FTSE 100. Standing at 5,693, the blue-chip index currently trades at a price-to-earnings ratio of 10.2 -- a multiple that is well below the average of 15 seen since the start of 2000.

That said, there are always shares that seem an even better value than the FTSE 100, and I'm always scouring the market for low-P/E bargains that offer the chance of a "rerating" and could beat a tracker by a healthy margin. Here are three names I believe should outperform over time:

1. Braemar Shipping Services (LSE: BMS.L  )
Fully listed Braemar Shipping Services looks a cash-rich bargain for investors searching for a generous yield combined with a low P/E. With a current share price of 337.7 pence, the company has a market capitalization of 73 million pounds.

Shares in Braemar -- which brokers ships and provides support services for ship-owners, shipbuilders, and the energy industry -- hit a recent peak of 420 pence in March but have slipped back along with macroeconomic confidence. This looks like a long-term opportunity.

At this price, the shares are on a prospective and historic yield of close to 7.7% and an anticipated P/E of 9.5 for the current year, which is lower still looking forward or back.

The dividend is covered 1.5 times by earnings and cash flow, and the shipping specialist has previously proven its ability to steer a prudent course through stormy financial waters. Over recent years, an increase in shipping capacity has led to lower rates and, therefore, commission. And the company has said shipping markets are likely to feel the effects of the tonnage surplus for a few years yet. But Braemar is making progress in diversifying its marine interests into areas less geared to the shipping market cycle via acquisitions.

Meanwhile, net cash of more than 80 pence per share and net tangible assets comprising half the value of the company are further reason for confidence in this high-yielder.

2. Haynes Publishing (LSE: HYNS.L  )
It's difficult to see much growth coming from Haynes Publishing, but with a share price of 175 pence and net tangible asset value of around twice the share price, it doesn't really need to.

The fully listed car manual producer, which has a market cap of 12 million pounds, has changed gear of late into electronic publishing. Haynes is expected to pay 16 pence in dividends for the current year -- a smidgeon more than last year, meaning the shares yield a whopping 8.8% at a buy price of 180 pence. Clearly, this is too high. So can the company keep it up? I think it can.

Yes, the latest trading update spoke of some of the most challenging trading conditions in Haynes' 50-year history. But this is already factored into the depressed share price, which is less than half what it was a year ago.

The company thinks the shift to digital publishing will help it grow. Meanwhile, earnings looking forward or back place the shares on a P/E of less than six.

Furthermore, the Haynes family owns a decent chunk of the shares (but not enough to cause worry of delisting), and the founder, John Haynes, is the chairman. With such a stake in the business, the Haynes family will do whatever is necessary to preserve value.

3. Robinson (LSE: RBN.L  )
AIM-listed Robinson makes injection-molded plastic packaging for global food and toiletry brands such as Proctor & Gamble, Nestle, Kraft, and United Biscuits. In other words, its business is quite defensive, so demand should hold up, whatever the economy throws at it.

Based in Chesterfield -- with two manufacturing facilities in Nottinghamshire and another in Poland -- and employing 225 people, Robinson was originally a family business, and it still has family members as major shareholders and directors.

At 102 pence, the shares are trading on an expected P/E of 7.4 for 2013 and are expected to yield close to 4%. The company's market cap is 16.26 million pounds.

The final results for 2011 were very encouraging. EPS for continuing operations came in at 11.9 pence as the company focused on more profitable areas. Better yet, NTAV per share of more than 140 pence should prove to be higher in reality. Robinson has surplus properties in excess of their carrying value. It will dispose of them when property market conditions improve.

What now?
Of course, there are never any guarantees with individual shares, and selecting companies outside the FTSE 100 generally carries more risk than buying a standard tracker. However, I feel that trawling the market, studying annual reports, and assessing valuations can pinpoint potential index-trouncing winners.

Indeed, backing overlooked small caps is one of the "Ten Steps To Making A Million In The Market" featured in a special Motley Fool report that outlines how ambitious investors can start on the path toward a magic 1 million pound portfolio. I'd encourage you to download a copy today -- you never know, your approach to investing could be transformed. The report is free and comes without any further obligation.

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David owns shares in Robinson. He doesn't own shares in Braemar Shipping Services or Haynes Publishing. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On July 06, 2012, at 11:36 PM, MrSinnister wrote:

    When will Discovery Labs (DSCO) finally get some love ? I mean they have 2 FDA approved products that go into distribution in the 4Q, with the FDA approval coming in March. They only have 43 million outstanding shares, with a current market cap of 125M which nearly multiplies with every 10 cent increase. They are going to distribute a drug for Respiratory Distress Syndrome for infants in the US and European markets, and they have TREMENDOUS upside, already up 60 percent on the year. Add to that two more drugs awaiting approval, Aeroserf, that is in a collaboration with Batelle to get streamlined and fine-tuned and Surfaxin LS, a liquid version of their already FDA-approved drug Surfaxin. How this stock stays in the 2 range is amazingly shortsighted.

    Value of Surf LS + Afectair: 275million

    Shares O/S: 43mil

    Tell me why we can't see $40+/share with DSCO. Note that my sell target is below this, but I expect the stock to soar once it gains momentum. Imagine that liquid surfaxin penetrates the market quickly and gets great reviews by practicing docs (which it should). Surf LS will be even better. And Aerosurf even better after that.

    Facts:

    1. one approved device

    2. one approved drug

    3. $40 million in cash

    4. no debts

    5. no preferred stocks

    6. no impending warrants (outside of the 5yr 5M at 2.80)

    8. exclusive rights

    9. excellent pipeline

    10. Newly partnered (Batelle for R&D)

    11. MAA approval soon

    12. New device new drug launch soon

    13. Mkt Cap 128 million ???

    At 3 times sales, this is already $400 million firm, and that is $10 PPS. DSCO === Hidden Gem.

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