Obscure postings

Posting late at night sometimes I don't communicate that well. I started mumbling something about small cap shares and then found bed calling so let me try again.

I think there may be some merit in certain of the JSE listed small cap shares in 2010 and here are a list of stocks which I believe should be considered. Some are great businesses with a good track record and some are a little higher risk.

AdvTech
South Africa's leading private education provider, AdvTech is one of those stocks which could be classified as defensive. Parents will always want to equip their kids with the best opportunities. There is a massive shortage in quality education providers in the country and AdvTech gives you one way of participating in it.

Historical PE multiple of 12 means its not cheap but sometimes you pay a little extra for a bit of quality

CIC Holdings
This is a nice little company which has re-rated significantly since I tipped it at 80c last year. Presently trading at around 130c a share it still only sits on an historical PE of 5 times earnings. Its a company that not a lot of people know much about but it owns quite a lot of agencies in growth markets in Africa. It's partly owned by Paladin Capital (PSGs investment arm). A positive for it is first mover advantage but a negative in that it is an agency type business and does not have a lot of its own Intellectual Property. Still might have some legs though.

Zeder
Jim Rogers is still mumbling on about farming being all the rage in the coming years and I can buy that story. Zeder, the PSG agri-ops business has been very aggressive in the last 12 months sorting out and growing its portfolio.

Paladin Capital
This is your alternative in the education space (but with far less concentration). Paladin - the PSG investment arm - is in the process of rolling out and expanding its network of Curro schools. These guys have been tipped as being super aggressive so and probably not the nicest management around but they'll get the job done.

Pallinghurst
This is the only resource play which jumps out at me but I am useless at judging the sector so don't go on my word. I was speaking to one of the resource guys yesterday and his thinking is that it will either be a 10-bagger or it will go nowhere fast.

Beige Holdings
I am probably going to take much flak for this one but this is a company I really like. Its got much too much paper in issue but its not the worst business around by the stretch of anyones imagination. It has quite a lot of negative legacy issues which its battling to shake off. However it has a major competitive advantage in terms of that new factory which it has put together in Chloorkop plus that factory in Durban (Quality Products I think its called). They can interchange product lines extremely quickly meaning they can shift up or down depending on demand. Paper is a huge issue though. Directors have also not been shy to buy their own stock.

Glenrand MIB
Buying a share in an insurance broking operation in the current economic climate seems to be madness. But that hasn't stopped the big-wigs at GlenMib putting their money down on a regular basis. Something is potting here and a historical PE of 9 considering the problems they had last year may be a sign that better earnings are coming through.

If anything else jumps out at me, I'll post it below this thread but it might be something to look at.

No recovery soon?

Again a few random musings which shows a very cloudy outlook for the real economy over the next few months.

Geopolitics
Politics is always tough to read and more often than not geopolitical "intelligence" is a big "what-if" game.

However there appear to be a few storm clouds brewing:

• The US over the last few weeks has found itself in a constant state of alert for terrorist threats both at home, in far-flung places like Yemen and of course in the Middle East. Whether there is a serious threat or not to the US the emotional drain on the American psyche has to be there
• Just tonight a Texas nuclear assembly plant was shutdown for securit reasons.
  
• A top Iranian nuclear academic was recently assasinated. Neither Israel nor the US are claiming responsibility but Iran is making some unhappy noises and this looks like it is rapidly coming to head considering the US deadlines which don't appear to have been enforced.
• More fuel is being thrown on this fire (excuse the bad pun) after Swiss commodity firm Glencore reportedly stopped selling gasoline to Iran. Something has to crack here and it looks like the US is on a colission course with Iran.
• Debt issues continue to plague Iceland, Ireland, Argentina and Greece as well as a number of other emerging markets which look shaky.
• US Centre for Disease Control reckons as many as 81 million people have been infected with H1N1 swine flu, 16000 deaths and 360000 hospitalisations.
• Lots of posturing between China and Google which I'm surprised hasn't really been picked up by South African media.

Economics

• Initial stimulus packages appear to have had only a short-term impact on the economy
• Job cuts both locally and abroad continue to mount. The pace may be slowing but each month there are a few more people joining the unemployed lines

I am reading some research from the NFIB Small Business Economic Trends for January 2010 and it would appear that there appears to be no real improvement in the confidence of US small business - a worrying sign was that 33% of SME's reported price reductions for products and services.

Locally I have had reports from one of the big media houses and two of the big financial services firms that there is another round of job cuts coming.

Small business confidence ticking up?
Having said that there are a lot of negatives in the economy, there seems to be some anecdotal evidence that some of the smaller businesses who were operating on a low cost base are bouncing back quite nicely.

Those who survived the carnage of last year appear to be consolidating.

So where does that leave us?
Disposable income is tight and markets don't look like they are going anywhere fast. Maybe there are some opportunities for some under-rated small-caps to shine through?

Things that look like they bear some consideration:

• CIC Holdings - quality branded goods licenses
• Advtech - Education
• Paladin - Education and financial services
  

Some fundamental calls

There are no shortage of opportunities to scalp around the commodities but finding deep value investments are a little tougher given the economic outlook.

Markets may have rallied and there may have been some stimulus in the system prompting some improved data but I get the sense we're starting a second downward leg.

Previously on this blog I've mentioned that I like the agriculture and food sectors as good bets over the next year or so. I've had my holdings in Zeder (plus followed the rights issue) and added to my shares in Country Bird Holdings (CBH) on the back of the directors dealings.

Another sector I hadn't given much consideration to was education in South Africa. Specifically private sector education.

Your main listed entry point for education at the moment is via Advtech which owns the Crawford schools. The share has run hard but they have an important area that AdvTech has is scale... You need scale and infrastructure to make a success of education for obvious reasons.

The second unknown entry point which I had only heard about quite recently was through Paladin Capital (a soon to be listed subsidiary of the PSG group). They've apparently got a fairly sizeable investment in a new education player which might be of interest....

** Author holds shares in ZED, CBH, PSG