Robbie Burns’ Trading Diary

As featured in this month’s Master Investor Magazine.

There’s been a whole spate of bids for small cap shares in the last month. Anite (AIE) and Thorntons (THT), for example, and one I had only recently bought in the expectation of a bid – Aga (AGA). Aga bagged me a 50% profit, which was very nice. It looks like there is plenty of cash around for bigger companies to buy up the small fry on the cheap.

If you do get a cheap small cap share there’s a decent chance it will eventually get bought out, and I usually manage to get 5-6 of these a year. Every time you get it right there’s usually a 30% to 50% increase in the share price. I usually find it’s a good idea to sell some, just in case the bid doesn’t go through, and hold onto the rest. The price of the share usually goes to somewhere near to where the market thinks the eventual bid price will be. Once the bid is guaranteed you can either sell the shares at a small discount to the price (I usually do that) or wait for the full payout. The whole process usually takes about 1-2 months.

What are the next small caps to fall prey?

I have a few ideas, and so here are five companies I have stakes in hopeful that one morning I wake up to the glad tidings. Really, there is no better feeling than seeing the news a company you have shares in is going to be swallowed up.

1. Gulf Marine Services (GMS)

This is an under-the-radar oil services company with a share price that doesn’t do a lot except sit between 115p and 130p most of the time. It’s one of the world’s leading providers of support vessels. Profits are up and it appears to be continuing to expand nicely. I would imagine this one to be a very handy fit with any number of oil services companies looking for acquisitions. Although its boss has said it isn’t for sale, I reckon an offer of 200-220p would be successful, and it really wouldn’t be a surprise.

2. iomart (IOM)

This one already got bid for last year but an agreement wasn’t reached at the 300p level. I think a bid at around 350p is on the cards here giving a 100p plus uplift to the price. This cloud computing outfit is putting out bullish statements with adjusted profit up nearly 15% in its last results. It’s been buying up companies itself. But I reckon within the next 6-9 months it will fall to a predator as the “cloud space” will see a lot of bids and mergers. I got lucky getting a 215p to 270p uplift last time. This time I’m in between 170p and 210p.

3. Quartix Holdings (QTX)

This one specialises in supplying vehicle tracking systems, a market where there is currently good growth. Pre-tax profit grew by nearly 10% in the last year and debt has been nearly wiped out. At the current price with a market cap of well under £100 million, there are loads of big companies for which this would be a nice buyout for small change. I’ve been in this since around 120p.

4. GB Group (GB.)

GB Group is one of my favourite companies ever. I’ve been in it for nearly five years, having bought initially at 20p. Now there is an extra nought in front of that as it trades around 200p now. It’s been in the right space at the right time – Identity data intelligence. The chart is a thing of beauty, lovely rises, and then plateaus then rises again. I have a feeling the directors would be happy with a bid of 275p here. It’s got such a lovely niche area that there might even be a bidding war over it.

5. Verona Pharma (VRP)

This one is an interesting penny tiddler that I picked up in the 3-4p area. It focuses on drugs to treat respiratory diseases. One of the drugs in its pipeline could treat cystic fibrosis. It’s raised a decent amount of cash to keep going, and if any if the drugs get approval the share price will go bananas. But in the meantime there are a few big drugs companies out there that could take an interest and just buy up Verona. Vectura (VEC), for example, is a much bigger company that also specialises in the same area. So I think if I were in charge of Vectura I might have a look.

Of course, all the above is pure speculation on my part; none of them may get bid for. But in any event all the companies mentioned seem to be doing well enough in their own right. Often patience is required in holding these types of companies, especially if they are non movers. But patience often pays!

I am away for the summer but should be back with a new column in the October edition. Have a lovely summer!