Small-cap businesses often suffer from wider price swings, compared to big companies. This is both a function of the (usually) smaller number of shares on issue, as well as an attractive growth story and a vulnerability to setbacks affecting that growth story.
As a result, small-caps can see outsized price movements both on the way up, and on the way down. Unfortunately, shareholders are often too spooked to buy the businesses after heavy falls, even though this could be when they offer the most value.
Collection House Limited (ASX: CLH) fell more than 50% this year after announcing a company restructure and a profit downgrade as a result of difficult market conditions. The subsequent resignation of the CEO and ongoing search for a replacement has kept shares subdued, despite yesterday's positive announcement.
At today's prices, Collection House is not priced for success and if the business can manage even to tread water it could deliver decent returns to shareholders in the next few years.
Lifehealthcare Group Ltd (ASX: LHC) is down 57% this year after a disappointing half-yearly report, which revealed declining margins and a heavy cash outflow due to rising operating expenses – despite revenue growing 15%. Some of the blame was placed on timing issues with regard to tenders, as well as delays in product launches. Further pressure was placed on the share price due to media reports that prosthetics were grossly overpriced, although management has claimed this is inaccurate.
Looking through the bad period to future reports, Lifehealthcare could be set for an improvement in performance, and much of the downside appears already priced into the business.
Last but not least, Nearmap Ltd (ASX: NEA) shares have declined 30% as investors become disappointed with the company's seemingly slow rate of expansion. Although revenues grew 20% in the latest half, the company hasn't been able to win a large number of contracts yet, even though customer 'renewal rates remain high'. An additional concern were the cash outflows required to fund expansion in the US, although these appear to be bearing fruit already.
Nearmap has around $14 million cash at bank, is operating cash flow positive, and continues to win customers in the US. Although not yet profitable, the company appears to have a decent shot at success and today's prices could well prove a bargain.
