Small caps: 5 ‘special situations' stocks worth examining

When you get it right, you can make many multiples of your original investment.

These 5 stocks are worth looking at but they are high risk

Small caps: 5 ‘special situations' stocks worth examining

Small caps: 5 ‘special situations’ stocks worth examining

One profitable niche for experienced investors is the so-called ‘special situations’ stock. This is because they are often undervalued and perceived as too high risk for all but the most adventurous investors.

‘Special situations’ covers a multitude of possibilities, ranging from company spin-offs to situations where a firm is struggling to or in the process of restructuring — perhaps trading at a discount to the cash or assets it holds — or where a takeover approach is likely. I’d also include a company where sales have long disappointed but where, for some reason, it appears business is set to improve.

Certainly they are high risk, very often listed on the AIM market and generally ignored or unloved by investors. Indeed, what information is available on them is patchy or out of date.

At best, they’ll only be covered by one broker, often you can’t find a single broker note on them.

Given all this it is hardly surprising that most private investors steer clear of them.

Still, when you get it right, you can make many multiples of your original investment.

Risk mitigation

To mitigate the risks inherent in such stocks I’d advise you do the following:

  • Never invest more than you can afford to lose in any single stock – certainly not more than 5% of your investing pot.
  • Take time to do your own research on the stock before committing any money. Key to this is checking to see the track record of those running the firm and the fund managers investing in it.
  • Be prepared to closely monitor the stock, while also being prepared for some volatility in its price.

My 5 picks

Here are 5 small cap special situation stocks that I’m personally invested in.

Castleton Technology (AIM: CTP)— This company is adopting a ‘buy-and-build’ strategy in the provision of software and managed services in social housing. Its management team, led by Ian Smith, have a great track record in consolidating acquisitions and deriving shareholder value from them. Fund manager Mark Slater has a 3.65% holding in it, while Nigel Wray holds 5.14%.

MXC Capital (AIM: MXCP) — This has gone through several incarnations (2ergo, Broca) and changed its management team before becoming a specialist merchant bank that invests and grows value in companies in the TMT sector. It’s got a very experienced management team, funds and contacts to make money from transactions in that space. There are no broker notes out on it but as news gets out on its progress it should rise further. Hargreave Hale has a 6.15% shareholding, Nigel Wray holds 18.4%.

Crimson Tide (AIM: TIDE) — It’s made very slow progress over the past 4 years with its mobile business applications software. However, its now gaining traction in a range of industries and has some great clients, which include Nestle with its first global contract. It is operationally geared and I anticipate it will make good progress over the next 18 months. In short, it has good upside with limited downside. It’s already profitable David Newton’s Helium Special Situations fund holds 20.4%.

ReNeuron (AIM: RENE) — This company is developing pioneering medical treatments using stem cells, which includes treating stroke victims. It is still heavily loss-making but on further progress in clinical trials will most likely become a strong candidate for a takeover. Fund manager Neil Woodford will hold 35.5% of its equity after a placing that was announced today.

Coms (AIM: COMS)— This is a recovery play. The company grew very quickly, making a string of acquisitions that it failed to integrate properly. From being a star performer its price fell right back. Now it has a new management team of turnaround specialists, which includes Frank Beechinor as chairman – although it has still to install its new chief executive. It is held by Helium which has just doubled its holding to 15.09%. Coms is priced to go bust but when the market realises it is making a recovery I expect it will rise substantially.

Using Equity Release to Invest

When it comes to borrowing money to invest, property often springs to mind. But did you know that real estate isn’t the only investment avenue you can explore? You could also use your equity to enter the stock market and invest in things like individual stocks, managed funds, and exchange-traded funds (ETFs).

Editorial Note: This content has been independently collected by the EveryInvestor advisor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.
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