In the first of this two part series we recap our UK small cap equity recommendations and performance for 2013, in addition to our top pick for next year. This year has been very much a stock pickers market, with different sectors, equity markets and asset classes diverging as certain economies improve faster than others.
The UK small cap market has been one that has seen some particular interest among investors as many of the companies, operating in niche business offer attractive attributes for the long term investor. With risk appetite returning, investors have ventured to the small caps for added sources of return, and more often the not, this has been the correct call during bull markets. UK small cap companies have outperformed their large cap peers by more than 15% this year.
While our coverage of UK small caps started in early August, this has not stopped us finding some great companies, both on a short and long term investing time horizon. The table below details our stock selection (UK small cap only) for this year.
Price when published (P)
Outperformance of the FTSE Allshare (%)
Cineworld Group plc
Howden Joinery Group Plc
Sports Direct International Plc
William Hill plc
Ocean Wilsons Holdings Limited
Dart Group PLC
Topps Tiles Plc
St. James's Place plc
Oxford Instruments plc
Range Resources Ltd
Quadrise Fuels International Plc
Ashtead Group Plc
HICL Infrastructure Ltd
FTSE Allshare Equal Weight Return
Fund Gurus Equal Weight Return
On an equal weighted basis, the Fund Gurus UK small cap selection has outperformed the FTSE Allshare Index by 13.38%. Undoubtedly the performance has been fairly mixed among the selection, with some outperforming others.
Three companies detracted from performance with Range Resources Ltd the bottom of the pile. Our coverage identified attractive value the company had to offer as it traded at a strong discount to assets. However, the key catalysts to release value have failed to transpire, with both the on-going merger consideration with International Pertroleum and the sale of the Texas assets still unresolved. The lack of news has unsurprisingly caused the share price to continue its slide, and while we remain optimistically bullish on its outlook, the risk remains high until such time as the sale of its Texas assets occurs.
The second worst performer was William Hill Plc , the UK listed bookmaker announced a mediocre interim trading statement, as one gambler took the company for over ~£2.5m in one night. Coupled with industry concerns, William Hill has failed to reach our valuation target. The growth opportunities within mobile and online platforms should continue to underpin healthy earnings growth over the medium term, and we reiterate our price target of 500p.
Dart Group plc was another stock to fall during October as its Q3 update spooked investors. A fall off in demand for holidays caused management to caution of a possible revision in earnings for the year. Despite this, medium term drivers for this low cost holiday group coupled with an attractive valuation remain attractive and we remain bullish. The stock has gradually rebounded from lows of 211p to sit only 1.2% below the article publish price.
A number of top performers over the second half of 2013 added to the outperformance. At the top is Quadrise Fuels International Plc , the alternative heavy fuel oil technology produced by the company started to gain significant interest over the last few months. With a number of strong catalysts still outstanding, investors took a speculative interest in this small cap. The stock shot to highs of 51.5p, 115% above the recommended entry point to rest back around 47p towards the end of the year.
The second best performer was Xaar Plc, the advanced digital printing technology offers high barriers to entry which has been undertaken in a number of key industries over the past 12 months. With many growth opportunities still available through further industry uptake and advancements on existing technologies, investors remain bullish on this stock despite rising over 300% YTD.
Another strong performer has been Topps Tiles, despite the company suffering over the past few years, recuperating from the recession, recent results have been positive underpinned by surge in housing demand within the UK.
Our Pick for 2014
Despite being our top performer from the selection above QFI still remains a fantastic opportunity for 2014. The core catalysts mentioned in the article are still outstanding with the key 'proof of concept' trial being carried out with Maersk to be announced in early 2014. Given the magnitude of the possible market for QFI's alternative heavy fuel oil, successful navigation of these near term targets could see 2014 as the start of a prosperous future for this company and its shareholders.