Three undervalued small-caps and a standout pandemic winner

TL;DR

George Enzo, the full manager of River and Mercantile UK Microcap Investment Trust, discusses investing in small UK microcap stocks listed on AIM and the qualities they look for in a business.

Transcript

hello today i'm joined by george enzo who is the full manager of the river and mercantile uk microcap investment trust george you invest in the very small end of the uk stock market companies that are listed on aim could you briefly run through the size of companies that you invest in and the qualities that you like to see in a business on the size... Read More

Key Insights

• 👂 River Mercantile focuses on investing in small UK microcap stocks listed on AIM.
• 🙃 The portfolio has a concentrated approach, owning around 40 stocks out of approximately 450 listed in the UK microcap universe.
• 👀 The investment philosophy emphasizes potential valuation and timing, looking for quality and growth opportunities.
• ❓ The trust's bias is towards quality and growth stocks, with a focus on early-stage growth companies and quality growth stocks.
• 😚 Investing in stocks with a market cap below £100 million can be challenging due to liquidity issues, but closed-ended investment trusts can overcome these challenges.
• 👨‍💼 Max Sight, a business in the cell therapy industry, has been a standout performer for the trust.
• 👨‍💼 The trust rotated its portfolio towards more consumer domestic cyclical businesses during the market recovery phase.
• ☠️ Science and Sport, Stem, and Litigation Capital Management are highlighted as undervalued companies in the portfolio with potential for re-rating in their share prices.

Questions & Answers

Q: Why do full managers tend to overlook shares with a market capitalization of less than £100 million?

The small size of these companies makes them a very small part of the market, often less than 1% of total market cap. Additionally, the liquidity challenges make it difficult to deploy and withdraw capital. However, closed-ended investment trusts like River Mercantile can overcome these challenges.

Q: Which companies have been standout winners for the trust in the market recovery phase since last April?

Max Sight, a business in the cell therapy industry, has been a standout performer, benefiting from high-profile placements and a successful listing on Nasdaq. DX Group, a UK logistics business, also performed well. Investments in distressed businesses like Jules and City Pubs also yielded significant returns.

Q: Can you name some undervalued companies in your portfolio with the potential for a re-rating in their share price?

Science and Sport, a sports nutrition company, trades at 1.5 times sales compared to competitors that were recently taken private at higher valuations. Stem, a software business with recurring revenue and strong growth, trades at 11-12 times EBITDA. Litigation Capital Management, a litigation funding business, trades at a modest premium to conservative book value.

Q: Have there been any other IPOs that you've backed this year, and are there potential IPOs in the pipeline for the rest of the year?

River and Mercantile have participated in IPOs of CMO Group, Virgin Wines, Supreme, Active Ops, and Lend Invest. While there are no specific IPOs currently known, Enzo expects more IPOs to come in September and throughout the rest of the year.

Summary & Key Takeaways

• George Enzo invests in UK companies with a market cap below £100 million, focusing on the bottom 20% to avoid liquidity issues.

• The investment philosophy at River Mercantile is centered around potential valuation and timing, looking for fundamentally strong businesses bought at a reasonable price.

• The portfolio has a bias towards quality and growth, with a focus on early-stage growth companies and quality growth stocks.