There are lots of different ways to be a value investor. When I’m investing in large companies I look for stability and strength above all, followed by the potential for growth and a low price, of course; but with small-caps I’m looking for something else entirely.
The very fact that these businesses are small means that they are less likely to have a decades long history of inflation beating growth – it’s hard to grow and stay small at the same time.
So why invest in small-caps at all if they’re not bastions of strength and stability, unlikely to be classed as a fortress fit for anyone’s retirement fund?
Big potential (and big risks) for small-cap investors
The answer is that they can be very volatile; both the businesses and their stock prices. Taking advantage of this volatility has proven to be one of the best ways to consistently beat the market over the long-term (IF you have the stomach for it).
Take Fibreweb for example. It specialises in industrial fabrics for all sorts of applications, from roofing to road building and pool filtration. The company is, by all accounts, a leading global supplier of such hi-tech fabrics.
However, instead of stability the company is surrounded by uncertainty. It had a lot of debt, not a lot of profit and about 40% of the company was in the non-woven hygiene fabrics sector which is apparently a capital intensive commodity business.
If you want to know why capital intensive commodity businesses are generally a bad thing then read some of the early letters that Buffett wrote to the Berkshire Hathaway shareholders, because Berkshire was exactly that sort of business.
The turnaround that may have already turned
The uncertainty stems from the fact that Fibreweb is undergoing a transformational turnaround effort, including recently selling off the 40% that was in non-woven hygiene fabrics; and there was a recent rights issue too, just to make things worse.
So where does that leave the company now?
The recent annual report says that the group is now smaller and more tightly focused on higher value niche areas. That all sounds very nice, and the opportunity to buy into a company after the turnaround but still at depressed prices is attractive, so what do the numbers look like?
Regular readers will know that I am not particularly fond of investment stories like the one above.…
