Trader’s Café with Zak Mir: The Week In Small Caps

A Resources Bias

One of the notable features of the London stock market is that investors, especially in the small cap space, tend to favour resources stocks above all else. This seems to be based on a perceived expertise on oil and gas or mining situations, largely based on a belief that if a company says there is something within a particular hole in the ground, it will be found.

Unfortunately, this is not always the case, as recent examples of Advance Energy (ADV) or Empyrean (EME) have shown. Yet the belief continues. While this may not necessarily be a problem, people dust themselves off and go to the next situation, it is clear that there are many non-resources companies that perhaps do not get the love they deserve. The consequence can be that people taking a punt on the latest gold prospect, do so at the expense of objectively strong situations in other stocks.

Life Sciences

A particular blind spot for London investors has been the life sciences area. Yes, it can appear to be rocket science. But a FDA or contract win is not that difficult to understand either. This week underlined the anomaly. Clinical research services group Open Orphan (ORPH) announced a bumper £6.2m influenza study contract, and recent months have seen the fast growing company reveal contractS wins worth tens of millions. Yet the shares are still well below where they were before the string of positive fundamentals were released. In the case of diversified life sciences group DeepVerge (DVRG), H1 2022 has seen revenues almost double, and once again the market has been slow to react to what is a fundamental inflection point for the company. The theory that investors are obsessed about resources stocks seems to be a valid one.

However, it is not all doom and gloom for investors in the biotech area. After chronically underperforming in the recent past, shares of antibody developer Fusion Antibodies (FAB) finally delivered a decent bounce on the appointment of a bigwig CEO. So it could be argued that this sector can win, if one presses the right buttons. Even Cizzle (CIZ), whose shares have had a torrid time since listing last year, has at last seen its shares bounce after securing partners to generate monoclonal antibodies and reagents for a commercial test, as well as signing licensing and royalty deals.

The Nasdaq

Nevertheless, there is still a problem with UK investors and the new economy. Stateside, they seem to get tech, and are happy to back a new idea however esoteric it may be. There the Nasdaq is legendary. If Meta and Netflix were UK companies one wonders whether they would even have got off the ground? It perhaps does not help that many of the high profile non resources IPOs have not exactly flourished here, such as THG (THG), Deliveroo (ROO), or most infamously, Aston Martin (AML).

Amur Minerals

Interestingly enough, sometimes the judgement of investors here, even in their own sector backyard is somewhat questionable. Earlier this year the management of Amur Minerals (AMC) presented a deal worth $105m. This was quite an achievement given that the company’s key asset is in Russia, and after the Ukraine invasion, looking a little vulnerable to say the least. This week resulted in a $35m deal, with the shares rising more sharply than when the bigger offer came to light. Maybe it is a case of shareholders deciding that one bird in the bush is better than two in their hand?

Liquidity Crunch

The early part of the summer certainly witnessed a liquidity crunch, with share prices slashed and very few companies able to raise money either for IPOs or placings. This week though, there were a couple of positive examples of placings helping share prices. Obviously, most placings are at a discount and result in a share price fall. However, now and again a stock rises and such situations are worth following up. In the case of Alkemy Capital (ALK), a lithium hydroxide processing play, we were treated to a premium oversubscribed placing from which the shares rallied over 20%. radiation and bio-detection technology solutions group Kromek (KMK), rose well after a £1.7 million raise through the issue of convertible loan notes.