5 Sold-Off Small Caps Going Cheap

The good news for investors is that many smaller companies have novel products and markets, are in new sectors of the industry or a run by innovative workaholics destined to succeed. Many of these small companies will become large, powerful businesses hereafter. The trick is to pinpoint which ones - and buy when conditions get rough.

Takeover speculation aside, according to brokers RKN's numbers and outlook look good. Recently it announced revenues growth of 8% for the 6 months to June 30, 2011, in spite of being adversely impacted by weak economic conditions in the UK and NZ, adverse exchange rates and a sluggish retail sector in Australia. "It is pleasing to see solid organic revenue growth in our core businesses, and that the continual push for furthermore efficiency gains is bearing fruit," said Clive Rabie, Reckon’s Group CEO. "Within the constraints of difficult market conditions, and the consequential delays in decision making, we continue our historical strong new product sales growth which in turn adds to our maintenance revenue base by adding new customers to the business each year."

It says that its QuickBooks and Quicken accounting software has continued to experience strong growth in its direct business, even though it has been impacted by weaknesses in the retail sector. Nevertheless this retail sluggishness is being offset by substantial new customer growth as a result of their online offering, QuickBooks Hosted.

"The group is then positioned as we pursue cloud computing opportunities in all of our businesses, also as expanding our addressable markets in both the Professional and nQueueBillback Divisions," said Rabie. "Our relationship with Intuit remains strong and we are excited about the opportunities that could arise from this partnership over the coming years."

Australia’s first listed legal firm, SGH is a consumer law firm with 75-year history specialising in personal injury, commercial, family and asbestos-related law and has 40 offices Australia-wide. It has legal teams in multiple personal injury practice areas, commercial law & business services, class actions, and superannuation & insurance, to name a few.SGH's calling card is its "No Win-No Fee" arrangement with customers, where there is no fee if they lose, however must pay fees and a success fee if they win. With its win/loss percentage sitting at in broad outline 98%, this is a lucrative earner for the company. The No Win-No Fee arrangement is only available for personal injury law.Since listing in 2007 SGH has grown through acquiring Trilby Misso, a personal injury litigation firm in Queensland, last August and at the time the NSW-based personal injury litigation form - Keddies Lawyers - in January this year.

Prior to the Keddies acquisition the company had a leading position in Victoria & Qld, so this latest acquistion puts them into a strong postition Australia-wide. Austock states that revenue is derived principally from the personal injury practice, which makes up roughly 80% of earnings, which it points out is both defensive & scalable. It as well believes that the company's brand presence is strong and underpinned by established referral channels & marketing. "Growth opportunities outside of Victoria are strong & then positioned with existing scale and access to capital to drive consolidation," it wrote in a innovation note.

Seek Limited is quickly becoming a favourite with brokers as it expands its operations throughout South America and Asia. Notably it is no.2 in China, and has the no.1 & no.2 sites in both Brazil and Indonesia - giving it the no.1 and/or no.2 spot in three of the five biggest countries on the planet. And let's not forget that it is as well no.1 in Mexico, which holds the 11th largest population. Consider this – the population of Australia is around 22 million. There are about 210 million people in Brazil; 243 million in Indonesia, and 1.3 billion in China. During Internet usage in developed countries like Australia and New Zealand is high, some experts say internet penetration in countries like China, Brazil, and Indonesia is then below 50%. In other words impressive growth potential.

SEK's operating divisions include online job classifieds, and training and learning. Seek Commercial enables browsers to search for businesses and franchises for sale, during Seek Learning assists jobseekers with career development.

Andrew Inglis, Shadforth Financial Group has a buy on SEK, saying that strong market positions in China, Brazil and Indonesia provide an excellent platform for future growth as many of these countries however have relatively low internet usage rates. "It will as well benefit from employers continuing to switch to online advertising," he says. "Discounted valuations on the overseas subsidiaries and its education and training business, at the same time with a solid balance sheet and strong growth outlook, present a buying possibility."

Back in late-May, Scott Marshall of Shaw Stockbroking analyst pointed out that the Internet is now the first port of call for those wanting a job, car, house, flight, product or service. Marshall said SEK was wasting no time taking advantage of a shift in search from printed materials to the digital space. He says it is an aggressive company that’s established dominant positions in the online Australian job ads sector, with nearly 70 per cent. And Seek is now expanding into Asian and South American economies, with more on the drawing board. "The group has as well established an effective strategy in the Australian classroom and online education sectors," he says. "It’s as well specialising in career enhancement for Australian and foreign students. We expect Seek to benefit from growth in online job ads numbers amid the related shift away from printed ads."

Rob Hopkins, Managing director of Smallco Investment Manager says that around 80 per cent of job ad volume is now via the Internet and job seekers seem to prefer the online space. However with its share of spend all in all only around 50 per cent, Hopkins says the possibility for future upside is enormous. During international business accounts for only 15 per cent of SEK’s net profit, he says the long-term possibility for it to eclipse the size of its domestic market shouldn’t be underestimated. As then as holding the number two job sites in China, SEK has the top two sites in both Brazil and Indonesia. Forecast revenues growth 27.6 per cent; dividend yield 2.6 per cent; and ROE 28.9 per cent.

The Internet Boom James Samson

And back in April in "Ride the Internet Boom" James Samson, of Lincoln Indicators said that the market reacted harshly when the company announced that its education division was experiencing difficult times, primarily due to the strong Australian dollar and regulatory changes for online student visas. He said online classifieds represents about 65 per cent of revenue, during weakened education accounts for 35 per cent. "In spite of the adversities faced by the education segment, the company, on the back of a buoyant labour market, is expected to continue experiencing strong growth in its online employment business in the short-to-medium term," Samson said. Samson described the company’s financial health as strong and investors may find some value.

Many stocks in the telecommunications sector have been dismal performers over the last few years - nevertheless is that reason to give up on the sector absolutely? According to one broker, there are a few smaller telcos that are beginning to buck the trend - including iiNet, Australia's no.2 internet provider.

The year to June 30 of $33

iiNet reported net profit for the year to June 30 of $33.37 million, down from $34.55 million in the previous corresponding period, due mainly to an unrepeated tax deduction in the previous year. Revenue increased 48 per cent from the previous year to $699 million, reflecting the first full year contribution from Netspace, which iiNet acquired for $40 million in March 2010. The company as well bought AAPT's consumer division for $60 million in July last year, and from October will begin moving those clients onto its own network and billing system. "In terms of profit growth in the then and there year, clearly we will get a bit more from organic growth, however the main game is about getting costs out of AAPT," chief executive Michael Malone said.iiNet added 7,700 broadband clients in the year to June, taking total subscribers to 641,000, whereas Telstra has 2.4 million fixed broadband subscribers. The roll out of the national broadband network is seen by the company as a long-term growth prospect. "We are genuinely excited by the increased market opportunities the NBN will bring, doubling the available market for iiNet's services," Mr Malone said.

Within the telco sector in the aggregate, Telstra boasts the biggest market capitalisation by a long way at $32.4 billion at March 16, 2011, however it’s not on Lincoln analyst James Samson's list of stocks to consider buying. "Currently sentiment in the telecommunications sector is poor, as political agendas and the National Broadband Network project portray a sense of uncertainty among industry participants," Samson says. "This uncertainty has resulted in several great businesses trading at depressed share prices. Telstra has been a major drag on sector performance, yet there are a few smaller companies bucking the trend."

Hamza Habib of Patersons Securities as well has a buy on IIN. "iiNet is the second biggest provider of broadband services in Australia its own ADSL2+ network reaches about 4 million households," he says. "Importantly, the company looks attractive for any acquirer looking to enter the Australian IT space."