When opportunity knocks with small cap stocks
In an uneasy market, good small cap stocks make excellent buys, say these Canadian experts, but make sure they’re as good as these three.
When the stock market takes off, small is good.
As a bull rally gets underway, small cap stocks lead the herd. It only makes sense.
There’s a lot of unrealized value in these smaller fry. They have room to grow and a market surge is just the time for them to blossom.
This has certainly been the case with the rally that began in March 2009 and lasted, with a few interruptions, for over two years.
Yet what happens to these stocks when the markets cool off?
You may find buying opportunities arising, says one group of Canadian experts on the subject.
KeyStone's SmallCap Stock Report is published in Vancouver by a group of independent researchers. They make a careful study of small caps in Canada, selecting companies with exceptional growth prospects. sound management and strong financial underpinnings.
And that’s the key to finding good buys in bad times. You’re not looking for some stock that caught a break in a hot market, but for a quality company whose shares were unjustly punished.
The best way to illustrate is with two stocks tabbed as “buying opportunities” in this advisory’s most recent report. A third stock is a good buy even though it split its shares and kept going up in price.
Behind the headlines
Orvana Minerals Corp. (TSX-ORV) had a spectacular run, from less than a dollar in 2009 to $3.97 this past December. Its subsequent fall in price offers both a buying opportunity and an object lesson in looking behind the headlines.
The company owns and operates three properties — a gold mine (with prospective copper and silver deposits) in Bolivia, a gold and copper project in northern Spain and a copper and silver project in Michigan’s Upper Peninsula.
In mid-May, Orvana’s shares hit a low of $2.21 in response to its second-quarter results and the announcement of a $15 million bridge financing agreement with its principal shareholder, Fabulosa Mines.
“We promptly issued an update stating that, in our view, the share price decline was an overreaction from the market,” writes the advisory.
There is some fire behind the smoke. The researchers are concerned about delays at the Upper Mineralized Zone (UMZ) at Don Mario in Bolivia, which helped to spur the bridge financing.
Still, management’s track record breeds confidence in its ability to solve these temporary problems, states the advisory.
“The company is now very close to generating a gradual, but ultimately substantial jump in production over the next nine months, whereby they would firmly cement themselves as a low-cost, mid-tier producer of gold with significant copper and silver credits.”
The risks for Orvana are the price of gold and the possibility of further production delays. These are risks for any mining operation, notes the advisory. There may be some dilution over the next 12 months “but we are basing our investment decision on what we consider the company’s potential to be over the next two to five years.”
The decision is that this stock is a Focus Buy, especially at the price. At the end of May the price was $2.50. Today it is $2.39.
Remaining volatile
It is worth noting that this advisory, unlike some others that favour small caps, does not focus most of its attention on mining stocks. On the contrary, it steers clear of the more speculative exploration firms.
Yet it does have one other mining stock that has turned up as a good buying opportunity. Breakwater Resources (TSX-BWR) has three producing zinc mines in British Columbia, Honduras and Chile. It is developing another in northwestern Quebec.
Its first-quarter results were frankly disappointing. When they were released in May the stock slid as low as $4.35 from a December high of $7.
Again, there were production delays. “Again, we thought the market reaction was overblown given the long-term outlook,” says the advisory.
The company’s strategy is to boost operational efficiencies at its existing mines and bring its Quebec mine into production in 2012. In the meantime, Breakwater remains profitable and has a “very solid financial position,” adds the advisory.
From its mid-May lows the stock shot up past $6, which may have closed a short-term buying opportunity, but not the stock’s long-term potential. “We expect the shares to remain volatile,” says the advisory. Sure enough, the market has pushed it back down to $5.20.
Breakwater is a near-term buy and a Focus Buy for the long term.
Extremely impressed
Glentel (TSX-GLN) does a brisk business selling cells and other wireless devices through 290 stores in Canada and 155 in the U.S.
“We continue to be pleased with the financial performance of Glentel,” writes KeyStone's SmallCap Stock Report, “and have been extremely impressed with the continued jump in the company’s share price.”
On May 16, the shares were split two-to-one, doubling the number of shares from about 11 million to 22 million. Each shareholder received one additional share for each share held on the record date.
After the split, the shares rose from $18.74 to $20.84 and have now settled back a bit to $19.05. Unlike the two mining stocks, Glentel pays a dividend, yielding 3.1 per cent on $0.59. This stock remains a Focus Buy.
Stocks that get shaved in a market setback don’t all become alluring bargains overnight. But when the market punishes a solid small cap with money in the bank and strong growth prospects, opportunity is knocking.
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