As many of you may know I am not adverse to stealing ideas from famous investors. If it is not broken why fix it, right? With this in mind as I approach any new investment in the small cap space I always remind myself of Peter Lynch’s famous quote “share price will always follow earnings and cash flow“.
For any new small investors reading this article if there is nothing else you learn from the rubbish I write, earnings and cash flow are the most important to keep in mind. While it might seem obvious, many investors get caught up in the “hype” of a company and end up losing money in businesses that are highly unlikely to ever produce any meaningful revenue let alone profits.
As I wrote in my previous article here you can monitor how a company is travelling via their Appendix 4C reports. This way you can project when a company should turn cash flow positive. You may even like to start building a stake just before this occurs because as you can imagine once this happens many investors will soon become interested.
An approach I will sometimes take is to start with a 20% holding of what my final position maybe in anticipation of the company turning cash flow positive. Once it occurs I will reassess the business and add the remaining stake if I am satisfied everything remains on track. ( example: If I wanted to invest $20K total in company X my first order would be for $4K or 20%)
I should add here that I will only enter a pre cash flow positive position (tongue twister) when I am extremely confident in the company. Most times I prefer to wait for confirmation via a half yearly financial report.
I know what you are thinking, enough of the lecture just get onto the 2 companies you pushed in the headline.
EML offers prepaid debit card programs for commercial entities, corporations and government departments. Presently EML manages over 850 programs in 13 countries including Austria, Australia, Belgium, France, Germany, Italy, Ireland, Netherlands, Portugal, Spain, United Kingdom, Canada and the United States of America.
RXP Services Limited is an ICT and digital professional services company, providing consulting and professional services to a number of S&P/ASX 200 corporations and government bodies in Australia and in Asia.
What I like
After losing its way a few years ago RXP appears to have regained it mojo along with the formula to not only grow client numbers but also to retain them.
RXP’s report in my opinion was extremely encouraging. Despite the negative response from the market I was happy to start a position in a company which is trading at an undemanding valuation when compared to its larger more well known rivals.
What was extremely pleasing to see (and should help to restore market trust) was the fact RXP reconfirmed guidance at the upper end of previously announced, along with the company being financially capable of pursuing future acquisitions.
Do you have an opinion on either or both stocks? I would love to hear it!
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Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.