One reader, however, recently wrote to me recently to complain that we no longer cover all of them, in particular the smallest companies on Aim. The reality is that we never have, at least not in any analytical detail. Instead our policy has been, for as long as I can remember, to focus on shares in companies worth at least £100m whilst scanning the horizon for interesting tiddlers.
We do, of course, provide the tools and techniques that private investors can themselves use to assess the prospects of those microcaps we don't regularly cover. But the reality is that it is often a leap of faith to back such companies, because it is very difficult to accurately forecast the growth in profitability and cashflow (not, I may add, in sales) you need to form a realistic valuation. Very often fundamentals are not what drives the price of microcap shares anyway, but sentiment and momentum – and as a result much of our advice surrounding such shares comes as warnings of the psychological traps investors must avoid.
One noteworthy company that arguably fits this bill is Fitbug. Shares in the fitness technology maker are up around 2,000 per cent since it announced on 21 October that retailers Sainsbury’s and Target would be stocking its products. Wearable tech is a hot trend, and such deals – including another with Samsung - could lift the company to great heights. But they’re equally no guarantee that profits will follow or that competition (of which there is lots) won’t spoil their party.
Remember, too, that Fitbug has been ploughing its furrow since its market debut at the current equivalent of 67p in 2004, since when its shares had fallen 99 per cent to 0.375p. And when illiquid shares fall to prices measured in the fractions of pence they do not follow the normal rules of investing as the meme spreads that big gains are there to be had. To boot, Fitbug's financials are horrible: negative shareholders equity, £6m of debt on its balance sheet, losses of £1.6m in the last 6 months, and no broker forecasts. Quite frankly, it’s still little more than a punt.
Many in the UK still don't invest in stocks and shares on the basis that the entire stock market is a gamble - not just the likes of Fitbug. Many prefer property in the form of buy-to-let, yet evidence suggests real returns from residential property and equities over the long term are on a par – and it is just as easy to make a buy-to-let mistake as it is to buy a dud share. This week's cover feature should help you avoid them.
