Small shares may be beautiful but buyer beware

Published in the Adelaide Advertiser, January 2013 by Sophie Foster

A Gold coin may not buy much these days, but for $1 or less, wealth experts believe there are bargains to be had in the Australian share market for savvy investors.

But, they warn, investors must have their eyes wide open’’ in order to avoid buying a lemon.

Of the 500 stocks comprising the All Ordinaries Index, roughly 180 are trading under $1.

Hundreds of other sub-dollar stocks are among the Australian Securities Exchange’s 2193 listed companies but usually fly under the radar because they are small.

RBS Morgans senior private client adviser Simon Ferguson said stocks sitting under the dollar mark were there for a variety of reasons including economic conditions, structural changes or because investors were still risk-averse.

I would say go in there with your eyes open and be aware. It’s nice to look at the potential upside but ask yourself whether you could stomach the potential losses that may arise in some of these smaller or more volatile stocks. Look at the potential downside risk.’’

Macquarie Private Wealth’s head of research Riccardo Briganti said the first rule of coming out on top was not to confuse the price of a share with the value of the stock.

A stock trading at $20 per share may be undervalued, while a stock trading at 10c may be expensive,’’ he said, necessitating a broad range of measures including valuation checks such as the price to earnings ratio for current price relative to the company’s earnings and balance sheet scrutiny.

The risk of a stock is more complicated than focusing solely on the price. A stock that is trading at near Coober Pedy had been loaded from Whyalla.

Mr Gillham said Fairfax shares had gone as low as they could and the only way ahead was up.

The other stock I like is actually Billabong. We’ve had three takeover bids this year, eventually somebody’s going to grab it.’’

As with most things, private wealth advisers don’t like to put all their eggs in one basket, with Mr Gillham recommending that you have only up to 10 per cent of a portfolio in the $1 or less trading price market.

If they go south, you’re only losing 10 per cent of your total capital,’’ he said. You really need to be putting your money into the big stocks . . . for the long term.’’

10c and has historically traded within a very tight price range could be said to be low risk. Alternatively, a stock trading at $10 could be described as high risk if it has traded as high as $60 and as low as $1.’’

Wealth Within chief analyst Dale Gillham said while it was an oxymoron to believe that a share price around a dollar was a bargain, there were a couple of stocks that he liked in the region including Arrium, Fairfax and Billabong.

Arrium (formerly OneSteel) is only trading at around 90c. A really good, well-managed company, it’s quite cheap at the moment,’’ he said.

Arrium managing director Geoff Plummer, right, will step down this year with the share price low but the company poised to increase its iron exports.

On Christmas Eve, it announced that it's first iron ore shipments from the Southern Iron project.