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Home / Special Reports / Small Cap Sparks

This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.

16 March 2015

Small Cap Sparks

It's likely you’re all au fait with the FTSE100, but something like FTSE Small Cap or AIM may not be as familiar. And if you’d heard of the indices, what do you know about their constituents? The likelihood is that it's not a lot - small cap shares or ‘alternative investments’ as they’re also known don’t benefit from the attention their blue chip counterparts garner from thousands of analysts worldwide. This means they are largely under the radar of the institutions which is good for you, the trader, since you have the opportunity to get in there before the big hitters snap up swathes of shares and effect large price movements.Small cap stocks are popular with the investor seeking high growth potential over the longer term - a company with a (small) market cap of $500m has more potential to double in size than one with a market cap of several billions. Indeed, FTSE100 heavyweights Barratt Developments (BDEV), St James’s Place (STJ) and ARM Holdings (ARM) were once small companies that have doubled in size (possibly more than once) over their lifetimes. How would it feel to have gotten into those stocks early?!Hindsight is a wonderful thing, of course, and that is why in this exclusive report we want to equip you with foresight by taking a look at several small cap stocks that are extremely popular right now for their potential to register huge share price moves of 5% or more in a single trading day, and even double (or halve) in size over the long term.Whether you are a short term trader looking to profit from high intraday volatility or a long term investor seeking the next market leading tech stock or challenger bank, the small cap indices are where you need to trade.See below for our small cap stocks to watch in Q2 2015.

Gulf Keystone Petroleum (GKP)

Gulf Keystone Petroleum Ltd (-)

GKP table

Gulf Keystone Petroleum operates in the….Gulf, with the majority of its wells in Kurdistan, ostensibly part of Iraq and one of the cheapest places to drill on Earth. The Kurdistani deposits are huge - almost 1/3 of those in Iraq where about 1/10 of the world’s oil comes from – and the cost of finding and extracting one barrel is, to GKP, a mere $12.

But there’s a catch. In 2014 GKP found itself caught in a standoff between Kurdistan’s semi-autonomous government and that of Iraq that left the oil producer blacklisted by the latter, unpaid for tens of millions of barrels already extracted for export and quite frankly in a situation every bit as sticky as the crude itself. Shares plunged by 30% between March and October, when withheld funds finally began to trickle out and GKP began to get paid.

Fast forward to this week, and shares have recovered 24% from their October lows and have had a good 2015 so far as investors pile in ahead of a potential takeover bid. With volatile trading channels linking the major highs and lows, GKP presents just the type of news sensitive stock small cap investors love.

Quindell (QPP)

Quindell Portfolio PLC (-)

QPP table

The infamous insurance claims outsourcer went on a shopping spree after a £2.9bn listing on London’s AIM exchange in March 2014, snapping up all manner of small companies in such diverse and colourful sub-sectors as law, solar panels, scaffolding and loft insulation. Come April, research firm Gotham City dropped a (nigh on nuclear) bomb, calling Quindell ‘a country club built on quicksand.’

Short sellers took center stage and rode the decline as shares plummeted 40% in one day! Oh, and did we mention three of QPP’s directors got in on the action in November? You couldn’t make it up.

In December, Quindell admitted that cash, a key metric of performance, had ‘not been as significant as previously anticipated.’ As we write, QPP is in talks to sell its legal business while it confirmed Thursday that it had sold its 25% stake in the National Accident Repair Service. Shares have rallied an astronomical 187% from December ’14 lows in true small cap fashion. Definitely one to watch in the coming quarter.

LGO Energy (LGO)

LGO Energy PLC (-)

LGO table

GKP’s oil-seeking sibling, LGO Energy operates in the Caribbean - worlds away from turbulent Kurdistan - and 2014 was a big year for the company. Having acquired the Goudron oil field in Trinidad, LGO’s shares caught fire after the company issued a statement confirming ‘proved and probable’ reserves totalling up to 7.2m barrels with a further 15.9m of contingent resources.

LGO obediently quadrupled in size between March and September 2014  as the share price fountained 456% before the collapse in oil prices finally came to bear on the stocks, seeing them enter a volatile but shallow downtrend in Q4 which remains to this day.

Continual reinvestment of profits onto drilling new wells in the Goudron field saw group production of around 1200 barrels per day (bpd) on 4 Dec turn into 1000 bpd from just one well on 15 Dec!

On the flipsidenowhere near all of LGO’s wells are producing 1000 bpd, leading many to believe the company is overvalued. Will LGOs astute management guide the company through the oil price doldrums and on to blue chip status in the coming years? Will the short sellers be partying on the beach? A bit of both, probably.

Afren (AFRE)

AFRE table

Another oil and gas prospector, Afren’s glory years were in the noughties when commodity speculation the world over was rife and there was good money to be made. After its IPO in 2005, shares skyrocketed 216% and while the financial crisis saw a reversal of fortunes, as it did for most small cap stocks, in 2010 investors piled into its $450m 10-year bond to finance acquisitions and well drilling in Africa. In 2013 the share price was still up 200% from the time of listing.

The collapse in oil prices has affected profits though, and the burden of debt has led to a massive default on interest payments in February. Afren currently has over £1bn in debt and, having sacked its CEO and COO for gross misconduct last year, has brought in ‘turnaround specialist’ Alvarez & Marshall to attempt a rescue.  With oil having potentially bottomed out and shares currently trading at around 5.5p, is Afren undervalued as we move into Q2 of 2015? Or has it got further to fall? How much furthercan it fall?!

Arbitrage

major attraction of small cap stocks is that they garner little or no attention in the City. As far as the trader is concerned, this means that the small cap universe is so under-reported as to make many small cap stocks improperly priced (also known as arbitrage). The savvy trader who invests time as well as funds can profit considerably in the short term from such arbitrage by speculating on perceived pricediscrepancies.

It's All About the News

Small cap traders don’t get bogged down in technicals. Alternative investments simply don’t move enough on a daily basis to make the statistics work. But when they do move, boy do they move! Suchhuge swings are initiated by news and perpetuated by flurries of intense trading. The most popularsmall cap stocks are the ones with a juicy story behind them – think management controversies, volatile relationships with foreign governments (a la Gulf Keystone), wild punts and adventurous forays into unknown business territory.

All of the above help to make small cap stocks the rollercoaster ride they are. Read the news right, and you stand to profit handsomely from the huge price moves they make - whether they go up or down.

Buy or Sell?

At Accendo Markets we don’t tell you what to do. It’s your call whether you buy or sell. Our aim is to provide the help you need highlighting opportunities which may be profitable to you, the trader, and assist you in making trading decisions from which you can benefit by the use of leveraged instruments.

Armed with the information we can give you, as a trader/investor you can make your own decision about what you consider the best opportunities in terms of stocks having potential to rise or fall. It’s your choice as to what you trade and in which direction.

Don’t forget, while many brokers focus purely on what to buy (tapping into investors’ natural bullish bias), Accendo Markets provides trading facilities that allow you to speculate on falling prices (‘going short’). If, for example, you thought a poor trading update would see a share price fall 10%, you could attempt to profit from the decline using one of our trading accounts.

For any questions on how to trade UK stocks via CFDs or shares, including ways in which your risk can be managed, call us to discuss on 0203 051 7461

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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