Anthony Clark, an independent analyst at Small Talk Daily Research, revealed that the small-cap sector had been the best-performing indices on the Johannesburg Stock Exchange (JSE).
The JSE All Share Index has been down 13.4% year-to-date, the mid-cap index declined by 10.2%, and the small-cap index is only down 1%.
The relatively strong performance results from share buybacks and robust earnings from small- and mid-cap companies.
“Most of the smaller companies have been much more resilient than the market has given them credit for,” Clark said.
The reasons for the good results include that these are well-run companies with low cost bases that can easily adapt to change.
Because the market did not expect strong earnings, the share price runs on the back of the results.
Despite their strong performance, many investors have pulled their money from medium and small-cap stocks.
Clark said institutional investors had decreased their exposure and retail investors followed suit by pulling money off the table.
“In the third quarter of 2022, it has been quieter in the medium- and small-cap markets than in the first quarter,” Clark said.
He expects the fourth quarter to be an interesting period in the JSE small and medium-cap sector with strong earnings and possible delistings.
Many good companies are trading at low price-to-earnings (P/E) ratios, giving investors an opportunity to pick up bargains.
“You can get good companies on the JSE with a P/E ratio of between 5 and 7 which pay good dividends, have strong earnings growth, and trading near net asset value,” he said.
Clark said that these low prices are why buyouts from private equity firms are still occurring.
“Companies like Kaap Agri, Invicta, and Curro have good earnings growth and are trading below or at net asset value,” he said.
“The market is ignoring these mid-cap blue-chip companies because there is a flight to safety.”
He said the medium and small-cap sector is currently offering good value for patient investors.
“You could easily use a decent filter and pick up great companies which will produce a good return in twelve to eighteen months.”