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Microcaps: investors say they are finding it tougher to locate ‘hidden gems’


Some 60% of wealth managers, fund managers and other institutional investors in the UK say because of shrinking coverage of micro caps from brokers and analysts, it is becoming harder to identify ‘hidden gems’ in the sector.

This is according to a new survey from MBH Corporation, a diversified investment holding company listed on the Frankfurt Stock Exchange and the OTCQX in the US, which acquires successful, well established micro-cap and small sized enterprises across multiple geographies and sectors. It surveyed 45 professional investors based in the UK who collectively manage $140 billion in assets under management.

In recent years, the level of coverage of the micro-cap market by brokers and research houses has fallen, and 22% of professional investors in the UK expect this trend to continue over the next 12 months. Only 16% anticipate this situation to improve.

As a result of micro -cap stocks receiving less attention from brokers and analysts, 35% of professional investors in the UK expect the cost of obtaining information on the sector to increase over the next three years, and just 28% expect this to fall.

Microcap shares have been among best performing during pandemic

MBH Corporation’s research also found that although micro caps are trading at a significant discount to the wider small cap universe, 16% of UK professional investors expect this to increase over the next 12 months.

“Since the Coronavirus crisis started, some of the best performing individual stocks around the world have been micro caps,” said Callum Laing, CEO of MBH Corporation. “However, given the limited level of coverage many of these receive from brokers and analysts, most investors won’t have heard of many of these companies. Our research suggests that the level of coverage of micro-caps could fall further, and this will make it even harder for investors to identify ‘hidden gems’ in the sector.”

In the last 24 months The Armchair Trader has radically increased our regular, week to week coverage of many of the microcaps in the UK and further afield. Our intention is to continue to expand this layer of coverage in response to investor demand.

MBH says it currently has 25 very successful and profitable small businesses in its portfolio and will continue its highly focused growth of well-established profitable small businesses across multiple geographies and industries.

MBH companies carry minimal debt, deliver around US$1m – US$10m EBITDA and are generally still run by their founders who become co-owners of MBH.

MBH says it aims to create substantial shareholder value through the consistent and accretive acquisition of excellent companies. It follows  a strategy where profitable companies convert their private shares into public shares or bonds in MBH Corporation plc in a perpetual earn-in model. Company owners are then incentivised to accelerate their growth trajectory using the resources of the plc including expertise, skill transfer of best-in-class practices, cross-selling to other group companies and where appropriate, zero cost funding for new growth projects.

Each group company retains its autonomy and follows appropriate corporate and financial governance. Business owners are also incentivised financially to enhance shareholder value through a share bonus scheme aligning their interests with public shareholders.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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