My name is David Thornton and I’m delighted to be taking over from Tom as a champion for penny share investing.
This is a dream job for me. It allows me to indulge my passion for investment, and in particular for investing in the kind of high-octane stories that can make very large investment returns.
The good news is that this is a superb time to be chasing these kind of stories. 30-odd years of investing have taught me that you can always make very healthy returns in the stock market. But small stocks are especially underappreciated right now. When you compare them to property, bonds and the investment mania going on in high-income stocks, you see an asset class that is both cheap and ripe for a real rebound in popularity.
It helps too that there are changes happening in society that can capture the imagination of the investing public. ‘Big data’ and biotechnology are two examples. But it’s bigger than that.
I believe we are living through a period of accelerating progress – one in which raw computing power is having a hugely disruptive influence on society.
And by investing in small, fast-growing companies, we stand to make the kind of returns we have not seen in the small-cap space since the early days of the dotcom boom.
Small-cap stocks are ‘ripe for a rebound’
Where are you investing most of your money this year? For me, shares are the one major investment class where I would be comfortable to invest right now. Let’s just consider the alternatives…
Interest rates on cash are at a level none of us imagined possible five years ago.
Bond markets have been in a manic phase, with gilt prices being driven up to unrealistic levels.
Meanwhile, ultra-low interest rates have encouraged investors to rush into high yielding shares in order to generate income. As a result, the largest and most successful funds are, unsurprisingly, those with an income and value bias.
Shares are undeniably cheap relative to other asset classes. And I think growth shares look especially good value.
In many ways, the small cap sector has spent the last two years working off the excesses of the resource boom. That story is now coming to a close. And many investors have been badly burnt in the process.
I think we are in the early stages of seeing the baton passing from value to growth to small-cap investing. But in truth, if I find shares with strong fundamentals – and there are plenty of them about – then we won’t need too much of a helping hand from the market.
In fact, with the exception of recessions and bear markets, small company investing makes sense most of the time anyway. I am skeptical when a study shows that a certain investment style always works – experience tells me that such trends don’t last forever and that they almost always stop working once they get the oxygen of publicity. Small companies, however, do seem to work. Why?
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There is never a bad time to invest in great companies
Well, the way I see it, the market can only look so far ahead. And it tends to expect high current growth rates will fade towards the average. But small companies that can sustain their superior growth will see upgrades to their profit forecasts which can drive returns for a great many years.
Another reason is that the market isn’t very efficient in the small company world. The smaller the company, the less the market is likely to know about it, and the more ‘inefficient’ the share price will be. So there can be great rewards for good research in the small company sector.
I also like the fact that small companies tend to be masters of their own destiny. The success or failure of the shares will be down to the performance of the company itself. With blue-chip FTSE 100 companies, so much of the investment return is a function of what happens in the economy and in the stock market as a whole – factors which are outside the control of the company.
Take Asos, a share that has made me a very nice return. When the online clothing retailer listed on the AIM market 12 years ago, the performance of its shares was always going to be down to the specifics of whether its website was successful; rather than how the retailing industry in general fared, or what happened to interest rates, or what stock market conditions were like and so on. A large retailer’s shares such as Marks & Spencer’s will be swayed more by these external factors.
Asos has been a wonderful example of this small-company effect. Despite the recession, the over-indebted consumer and the savage bear market, £100 of Asos shares bought when the company first listed in 2001 are worth £22,000 today; while £100 spent on M&S shares at the same time would be worth £161.
My job is to identify those small companies with great growth potential that will prosper regardless of what the wider stock market and economy is doing. And my job is easy when there are such exciting growth industries out there: I’ll mention just a couple for now.
Two great growth stories
The broad sector of technology is a favourite of mine. It spent many years out of favour as the excesses of the dotcom boom were worked off, but it is home to plenty of interesting small companies, particularly in software and services. By its nature it is a dynamic field, rich in opportunity. I believe the key driver to innovation and growth in tech is the relentless year-on-year decline in the cost of computer processing power.
This phenomenon, known as ‘Moore’s law’ after the founder of Intel who first identified it, has been in place since the invention of the integrated circuit in 1958. It has meant that companies and individuals can afford more computing devices every year and do more things with them. Today’s exciting technology themes of ‘big data’, cloud computing and mobiles have all resulted from this supply of ever-cheaper processing power. I have some great stock ideas within these key themes; and I also aim to be alert to the next big thing that comes along. Tech will keep throwing up fresh opportunities.
Healthcare is another industry with terrific underlying growth characteristics. The demographics of an ageing population in the West, combined with an increasingly wealthy consumer in the emerging-market world, underpin insatiable growth in demand for healthcare. The supply side is even more exciting than the demand opportunity, with advances in genomics, biotechnology and medical devices having the potential to transform medicine over the coming decade.
It took over $3bn and more than a decade to sequence the human genome. In fact, my wife worked at the Sanger Centre near Cambridge where the human genome project was jointly based and I can recall the excitement as the genetic code was cracked. That was just over ten years ago and we are now beginning to reap the benefit of all that investment. It now costs less than $5,000 to sequence a human’s genome and only £100 to carry out a series of genetic tests to determine an individual’s susceptibility to over 200 diseases. Again we see falling costs supporting innovation and opening up a new world of possibilities in targeted health care.
Although we like to run ourselves down in this country, I’m confident the UK can compete and develop exciting, growing companies in this sphere. We boast three of the top 11 institutions in the 2013 world university rankings for engineering and technology (of the others, seven are American and one Swiss). The UK fares even more impressively if we look at the rankings for health research: we are home to four of the top six universities in the world. We are not short of talent nor the opportunities to apply it. I’ll tell you more about some of the great British companies you can invest in over the coming weeks.
• This article is taken from David Thornton's free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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