I've always believed enterprising investors with a long-term horizon should focus on spending a majority of their time researching stocks in the small-cap space. That is, companies with market capitalisations between $100 and $500 million.
In doing so, I think investors are more likely to find mispriced stocks because more often than not, they are followed by fewer analysts and fund managers. Having a variant perception enables us to exploit these opportunities and achieve market-beating returns.
However, all investors should maintain a diversified portfolio consisting of blue-chips, small-caps and cash.
At the moment, I have a lot of exposure to the small-cap end of town (over 50% of my holdings have market capitalisations below $500 million) and recognise I need more blue-chip exposure.
Three stocks I've had my eye on for a while are Computershare Limited (ASX: CPU), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) and Woodside Petroleum Limited (ASX: WPL). I like them because they have reputable track records for growing shareholder returns and their strong management teams assure me they'll continue to grow long into the future.
Computershare is the name behind share registry services for many big name multi-national companies and has exposure to over 20 countries. Although its 2.6% dividend may seem lacklustre, the company has a wide economic moat (competitive advantage) and will also benefit from a rising US dollar. This gives me confidence its earnings and dividends will rise in the medium term.
WHSP is another established business with brand recognition and diversified operations. It is a listed holding company which has been in existence for over 100 years. Over the past 10 years, the company has outperformed the market as its smart investments pay dividends.
Lastly, Woodside Petroleum is a company I've had my eye on for quite a while. It has great management, solid balance sheets, an exceptional dividend and a track record for growing shareholder wealth. Whilst analysts are forecasting a 6.1% fully franked dividend in the next 12 months, I'm holding off investing in it for now because I think its shares aren't exactly cheap. Furthermore, investors may be forgetting the Browse FLNG project won't be online for some time.
Buy, Hold, or Sell?
I think all of these businesses are great and I am actively considering adding them to my portfolio. I think Computershare is a good long-term buy at today's prices, but I'm holding off buying both Woodside and WHSP until their share prices offer me a better margin of safety.
