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Deep value buying opportunities

Four companies that have been materially de-rated in the market sell-off and offer strong rebound potential

When I compiled my 2020 Bargain Shares portfolio, I focused on companies with strong balance sheets, and made a conscious decision to take financing risk off the table. In fact, all bar one of the 10 small-caps I selected are cash-rich.

For instance, CIP Merchant Capital (CIP:44p), a Guernsey-based closed investment company that predominantly invests in listed equities by adopting a private equity style approach, held half its portfolio in cash when I published my portfolio. The hefty cash backing proved a drag on performance last year when NAV declined slightly to £46.2m (84p a share). However, by keeping its powder dry for more attractive investment opportunities, CIP has been shielded from the worst of the stock market crash. Indeed, the portfolio outperformed the FTSE Aim All-Share index by 11 percentage points during the first quarter of 2020, albeit it took some hits as the latest NAV of £37.5m (68.2p) highlights.

What this means is that net cash of £18.6m (33.8p) now backs up 77 per cent of CIP’s market capitalisation of £24.2m, so effectively CIP’s portfolio of investments are in the price for £5.6m, or 70 per cent below their £18.9m market valuations. To put the ‘margin of safety’ into some perspective, CIP’s stake in CareTech (CTH:380p), a heavily asset-backed provider of social care services and one of the largest companies listed on London’s junior market, is worth £3.5m alone.

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