2017 was a great year for some small New Zealand companies. Standout performers included Serko +655%, PushPay +198% and Eroad +124%. Smaller companies can provide opportunities for large returns (and losses), given they are typically at an earlier stage of their life cycle and receive minimal broker research.
Source: Iress, Milford.
Minimal broker research
A company’s size is very influential in determining how much research coverage they get from brokers. This is because larger companies tend to generate greater brokerage commissions and corporate advisory fees. Outside of the NZX50, many companies are not researched by brokers or well followed by investors. This creates opportunity.
Legendary investor, Peter Lynch wrote in his book One Up on Wall Street, “If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner. When I talk to a company that tells me the last analyst showed up three years ago, I can hardly contain my enthusiasm.”
Early stage companies
All large companies began as a start-up with an idea and vision. Two of New Zealand’s largest companies Xero and A2 Milk both started out as small caps listed on the NZX with an initial market cap (i.e. value) of $55m and $9m respectively. When Xero first listed they had an early stage product with no sales, while A2 was licensing their research for minimal sales. Both companies started from humble beginnings and went on to build internationally recognised brands, becoming some of New Zealand’s biggest success stories.
If you can identify them early, investing in a company with the potential to win share in a large market will result in significant returns over the long term. Both Serko and PushPay were examples of this during 2017.
Case Study: Serko
Serko is an example of an early stage company that took share in a large market, that wasn’t researched by brokers. Serko provides an online booking tool that allows corporates to manage their own travel.
After listing on the NZX in 2014 at $1.10, Serko missed its forecasts underperforming investor expectations. Following the downgrade Serko largely dropped off the market’s radar and the share price continued to decline over the next few years to a low of 25c. While revenue growth was slower than expected, a lot of intangible work was done under-the-hood as management improved their product capabilities to win additional business.
In 2017 the value of this work became evident when Serko announced their new product Zeno, an online predictive travel tool that uses artificial intelligence to make travel bookings easier. On the back of this Serko secured a memorandum of understanding with ATPI Group to license Zeno globally. During the year Serko also announced a maiden profit and multiple partnership triggering a significant increase in share price during the year.
At Milford our large investment team researches companies both big and small, turning over many stones to find opportunities that may have been missed by the market.