Paul's 2023 Watchlist - Top 20 Ideas For Value/GARP Small Caps

8th Jan '23 by Paul Scott

52 comments 9343 reads

My 2023 watchlist for small caps

2022 was a terrible year for me, and for small caps and tech investors generally (with both AIM, and NASDAQ, down by about a third). Personally, I've given a lot of thought to all the things I did wrong in 2022, and learned the lessons hopefully. So I don't think reviewing a lousy year is a productive use of time. I'd rather look forwards, and see how we're going to make the money back again, with good ideas for 2023 and beyond.

Like many investors, I keep a watchlist of shares that I think look interesting, follow the prices, and then sometimes buy things on the list, e.g. if there’s a positive or in line trading update together with a solid outlook statement (I generally only buy after a decent trading update, to reduce the element of guesswork and profit warnings, at least initially). So when I spot an interesting share, I add it to my watchlist.

I thought it would be useful, and fun, to go through my watchlist of c.100 shares, and select what I think are the top 20 best ideas (from a Value/GARP investing perspective), and publish them - as ideas people might want to research further. Never recommendations, as it's up to you to research everything yourself.

Obviously I can’t predict the future, so I have no idea what the share prices of any of these will do. All of them are likely to go up, down, or stay about the same - but unfortunately at this stage, I don’t know which will be which!

In the past I’ve found that in a good year, I typically get a winner:loser ratio of about 60:40, in a very good year it can be as high as 80:20, and about 1 year in 3 or 4, I do badly, and have more losers than winners.

2022 was a very bad year, where my ratio of winners to losers was more like 10:90 - but that’s to be expected when the whole of AIM fell by about a third. Plus I was just in the wrong sectors, and over-concentrated, and I badly misread the macro picture. So there we go. Let's just draw a line under it, with my apologies to anyone who was influenced by my misplaced bullishness on some shares.

However, in the…

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pjegeorge

9th Jan '23

I've followed you for years Paul and have always been impressed by your honesty when it comes to your investments. It's been a tough year for most of us, who knows when the market will turn in our favour. Your analysis has always been excellent and that's what makes money in the long run.

Gmjs

Somero seems too cheap, they've built capacity to support a $175mm topline business. That's 25% growth from here, if they get anywhere near that over 5 years or so you should get paid reasonably well. Expectations seem too pessimistic. Re. takeout, CEO was there for Dover's purchase and the subsequent spin out so there's some background there.

GAW I was buying quite aggressively under £70, I'd like to buy more but had fair value around £85. Will revisit

How are you getting 50% ROE for Centralnic? I put this one on the too hard pile as the accounts are messy and management seem too promotional for my taste but if that 50% ROE holds water on a forward PE of 10ish I might be tempted into a small position...

Whitbourne

I agree with davidjhill about themes, it helps me rationalise why I hold the companies that I do. Occasionally I will invest outside a theme and then it forces you to think why you are doing it. Background: I'm about 10 years from retirement and investing through a SIPP, with around 30 shares held at any one time. Here are my top 5 for 2023:

Volex (LON:VLX) is the only one of Paul's 20 that I also hold. This is part of my 'electrification' theme, I think we are in the early years of a 2-decade transformation in transport and energy systems and Volex is well-placed to capitalise on that, well-run and with good geographical and product diversity. Great organic growth as well as a track record of successful acquisitions.

Atalaya Mining (LON:ATYM) is in the same theme and is one of the few copper miners in western Europe. I have great admiration for the likes of Central Asia Metals (LON:CAML) but the political risks are a concern. There was a nasty impact from energy price rises last year, which are now abating and later in 2023 the company will switch on its own 50MW solar facility. I also hold Rio Tinto (LON:RIO) for the dividends, but it hasn't got the same potential for share price appreciation.

Polar Capital Holdings (LON:POLR) has been mentioned by others and is my pick of the fund managers. The sheer quality of the operation will shine through. I have held this a long time and of course would have been smarter to have sold in mid-2021 and bought back in. But there have been generous dividends in the meantime and I could see these doing well as the recovery gathers pace in late 2023 and 2024.

Kenmare Resources (LON:KMR) is my pick of the 'overlooked miners that are well-managed and just too cheap' category, with a P/E in low single figures, decent dividend and in-demand products. Also in this category is Sylvania Platinum (LON:SLP) although there are worries about their dependency on other mines and whether they will run out of feedstock. I also own Shanta Gold (LON:SHG) which hasn't gone as well as hoped, but I think is well-placed once the new mine in Kenya starts producing later this year. I went into this one too early and have some ground to make up.

Avation (LON:AVAP) the aircraft leasing company is my final share and is harder to categorise. Hit hard by the pandemic, the management team held the business together and it is now well-positioned to make further progress in 2023. I like the way they have positioned the company in fuel-efficient aircraft and the discount to NAV is just too great. Of all five, this is the one with greatest share price potential over 12 months - it could easily double and would still be decent value IMHO.

I also have dull but safe names like Aviva (LON:AV.) and Legal & General (LON:LGEN) that are cash-rich, well-run (some Aviva shareholders may disagree) and pay regular dividends, they are hold-forever stocks as far as I'm concerned. But they are hardly SCVR territory.

And Tremor International (LON:TRMR) of course. Grrr... don't talk to me about Tremor.

Thank you to anyone who has read this far and best wishes for a successful 2023! And of course a massive 'thank you' to Paul.

Bouden54

ROE is a backward looking measure so not usually the main thing I look at - it is useful for things like banks and insurers, but perhaps less so for more typical trading companies. Of course if a company continues to deliver ROE of 50% then the share price is going to see pretty spectacular gains. But just because it did 50% before doesn't mean it will again.

Poker111

10th Jan '23

CentralNic (LON:CNIC) sentiment seems much improved after recent CEO change and greater focus on shareholder returns.

Tony Drew

Have noticed that Thungela yield is 50%, I hold and have had a huge dividend already. Any comments welcome

MichaelFBS

Excellent list. Thank you Paul. I only hold one Volex (LON:VLX) where I like the management and knowledge of one other Best Of The Best (LON:BOTB) which I use to hold and got severly burned and I don't trust the management but might have to revisit.

Will take a look at the others over the coming month.

Regards

Michal

Copy the link to Paul's spreadsheet (right click on the link and select copy link).

Paste in to your Chrome browser.

Click on File

Click on make a copy.

That should work.

Michael

Effortless Cool

RoE is no more a backward-looking measure that PTP, EPS or DPS. If you calculate it off historical data, then it is backward-looking; if you calculate it off projected data, then it is forward-looking.

Rusty2

I currently hold 6 on the list, most I have held for some time. There are a few that are also my watchlist whichI started last August. Since mid October it is up around 17% which is not bad, considering more are being added recently, certainly better than my current folio. So I'm thinking of dumping a lot of older non performing stocks and start afresh. Although quite a few have bounced off their lows, such as Redde Northgate (LON:REDD), Saga (LON:SAGA, SCS (LON:SCS) , Sanderson Design (LON:SDG.

batt

Thank you Paul. Very helpful, I hold six of these companies. VLX, WJG, GLE, HSP, BLV & PMP so I hope you are spot on!

Actually it is 7, I hold which are: Belvoir (LON:BLV) Cerillion (LON:CER, Hargreaves Services (LON:HSP, Sanderson Design (LON:SDG), Sosandar (LON:SOS), SThree (LON:STEM), Volex (LON:VLX.

Bluesky Ventura

Reading some of the posts, I wonder if everyone realizes these are actual companies chosen not to hold by the blogger?

Tanglands

This is just brilliant paul and has started a great sharing of ideas and information for dyor!
I survived 2022 with my top two holdings bank of Ireland and plus500 both more than covering the” rest” .

For this year an eclectic mix.

Destiny pharma, a lot to like, but understanding the reality of needing a partner for US entry is key. Think if/ when they get US partner this could move significantly, again.

Global ports holdings. Fails your balance sheet test I guess with its debt/ balance sheet, but long term and tied to the asset base. A different play on the growing cruise market , and global revenue streams, with the US still to be attacked.

Like others, somero

Sosandar, has macro and fashion risk, but brand loyalty is strong and the management team haven’t really put a foot wrong so far.
can see real growth via further third parties in 2023

Final one is a bit left field , Amedeo air four plus, yield is crazy. I think their market will hold up . Thai air need to survive but if they do aircraft leases go out to 2035. Directors at last six months report, stated they are looking at ways to unlock shareholder value.......!

These represent some of my holdings that i am hoping will produce my greater returns in 2023.

Hope this is of mild curiosity to others .

All the best

Thai Airways should survive, the Thai government own nearly 50% and I doubt will let them go under.

djones08

Hi George, appreciate the comments.

CNIC -

9 months $61m EBITDA /3x4 = $81m (strongest quarter will result in more)

Less $22m Depn and ammortisation = $59m for year

$59m / equity of $114m.

Any comment on INDV?

Thanks Bouden54; although backward looking, if can be achieved consistently (not a fluke) it means management (in a growing market) can deploy capital at high rates of return. Worth reading the "Dhando Investor" if you want to find out more.

hugoc

Paul owns up to 2022 being a terrible year. The question is have we taken our medicine from the Bear market or is there more to come this year?

Until we are sure the pain is over it is pointless to re-enter the market.

There has been no capitulation, interest rates are still rising but negative when inflation adjusted, recession is reducing earnings, etc, etc..

Both Paul’s list and the AIM market will do well when the final shake out is concluded.

The questions we must answer first is, “Where are we in the economic cycle? Where stands the investment clock? Is sentiment at capitulation, etc?

Bear markets end in sharp falls and Bull markets rise in small steps. Standing on the side lines and patience still seems the safest strategy. Being late loses no money.

11th Jan '23

Hi Paul, any reason why Warpaint London (LON:W7L) is not in your top 20, you seem quite keen on it?

Paul Scott

30th Jun '23

Hi Rusty2,

Sorry, just seen your message. Unfortunately I forgot to include Warpaint London (LON:W7L) in my list, which was an oversight. Pity, as it's up 48% YTD as of 29 June.

Regards, Paul.

Paul's 2023 watchlist - top 20 ideas for value/GARP small caps

My 2023 watchlist for small caps

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