The new billionaires’ club – M2, AHE & SGH

Capitalisation – meaning a stock’s value on the market – is more than just the product of multiplying the share price by the number of shares, or a means of ranking stocks. ‘Market cap’ can definitely be a factor itself in the way in which a stock is perceived.

Clearly, rising market cap is a good thing, because it means the share price is rising – with the opposite holding true as well.

Market cap changes are closely watched by professional investors and are often considered causes to buy or sell.

That certainly applies when a stock joins – or leaves – an index. The growth of index funds, exchange-traded funds (ETFs) and index-based portfolios means a surge in index-related buying – or selling – when index composition changes (see Paul Rickard’s article here). In northern hemisphere markets, there are fund managers who specialise in index-change-related price gains and falls.

The giants

The giants of the stock market are the large-caps, all the way down from the highest market cap, Commonwealth Bank (CBA) at $124.3 billion, to the end of the S&P/ASX 50, which ends at Incitec Pivot (IPL), at $4.84 billion.

Next comes the ‘mid-caps,’ ranging down to stock number 150 on the capitalisation list – currently Sigma Pharmaceuticals (SIP), at $790 million. Below that level – down to the end of the S&P/ASX 300 Index – are the ‘small-caps,’ which presently ends at stock number 300 on the list, software and electrical products group Codan (CDA), at $115 million. Anything below this is a micro-cap.

Riding a small-cap that grows to become a mid-cap, and hopefully goes on to attain large-cap status, is what stockmarket investors should be trying to do.

Let’s look at the stocks clustered around the $1 billion mark, where stocks on the rise are breaking through from small- to mid-cap, but other stocks are passing them going the other way. A market value of $1 billion doesn’t mean much on its own, but for stocks on the rise, cracking the 10-digit barrier is an important psychological boost.

Two stocks that demonstrate why market cap itself cannot be used as a criterion for deciding the merits of a stock as an investment are Charter Hall Group (CHC) on $1.26 billion and Whitehaven Coal (WHC) on $1.67 billion.

For example, back in mid-2011, with steelmaking coal riding high at about US$300 a tonne and thermal coal at US$130 a tonne, Whitehaven was worth $7.20 a share – or $3.55 billion.

Now, with steelmaking coal at about US$105 a tonne and thermal coal at about US$75 a tonne, Whitehaven has lost two-thirds of its value.

In contrast, at the same point in mid-2011, Charter Hall Group was worth $790 million. Although it is quite some distance from its peak price of $4.64 reached in May 2013, CHC is a stock on the up.

The giant killers

Here are five more stocks that have just cracked, or are about to join, the billionaires’ club.

M2 Group (MTU)

S&P market cap: $1.01 billion
Down 9.6% in 2014
One-year total performance: 12.5%
Three years: 23.9% a year
Five years: 68.7% a year

M2 has become the fourth-largest player in the Australian telecommunications market, having spent more than $500 million since 2008 buying Unitel, People Telecom, Primus Telecommunications, Dodo and Eftel. The company has said it is preparing to spend more than $100 million on new acquisition targets this year. M2 has flagged a revenue figure of more than $1 billion for the current financial year – which would mark the first time above that mark – as well as lifting net profit by 48%, to between $60 million–$70 million.

Independence Group (IGO)

S&P market cap: $933 million
Up 28.6% in 2014.
One-year total performance: 7.1%
Three years: –15.5% a year
Five years: 6.3% a year

Western Australian nickel miner, Independence, introduced good diversification in 2013 with the beginning of production from its 30%-owned Tropicana gold mine, and its wholly owned Jaguar/Bentley copper-zinc-silver operation in Western Australia. Independence is also hoping to bring into production its Stockman copper-zinc project in eastern Victoria. The company is a solid, multi-commodity junior miner with high-quality, diversified assets, a strong growth profile, a healthy balance sheet and a good exploration portfolio.

SAI Global (SAI)

S&P market cap: $877.6 million
One-year total performance: 16.6%
Three years: –2.9% a year
Five years: 14.6% a year

It’s not often you find a monopoly on the stock market, but SAI Global, the former Standards Australia International, is about as close as you can get. SAI has exclusive rights to distribute more than 6,500 Australian Standards in Australia: these rights expire in December 2018, but SAI holds an option to renew for a further five-year term. The company also holds the rights to distribute in Australia all of the International Organisation for Standardisation (ISO) and International Electrotechnical Commission (IEC) standards, as well as standards and specifications from many other bodies. SAI is one of the world’s largest single sources of technical standards: on top of publishing the standards, SAI provides training and assurance (certification) services to companies to make sure they meet those standards, as well as manage and integrate the standards into their organisational processes.

Automotive Holdings (AHE)

S&P market cap: $1.05 billion
Up 6.1% in 2014.
One-year total performance: 7.3%
Three years: 20.7% a year
Five years: 37.3% a year

Australia’s largest motoring group, Automotive Holdings is a diversified automotive retail and logistics group with operations in every Australian mainland state and in New Zealand. The company’s car marques include Alfa Romeo, Bentley, Chrysler, Citroen, Dodge, Fiat, Ford, FPV, Holden, HSV, Hyundai, Jeep, Kia, Mazda, Mitsubishi, Nissan, Peugeot, Porsche, Subaru, Suzuki, Toyota, and Volkswagen. Truck and commercial vehicle brands include Freightliner, Fuso, Higer, Hino, Iveco, JAC, LDV, Mercedes-Benz, Rosa, and Volkswagen Commercial. AHE also operates specialised logistics businesses throughout mainland Australia and New Zealand – recent acquisitions make it the largest cold transport and storage provider in Australia. It is a high-quality but little-known industrial stock.

Slater & Gordon (SGH)

S&P market cap: $905 million
Down 7.6% in 2014
1 year total performance: 78.3%
3 years: 30.1% a year
5 years: 25.7% a year

Law firm Slater & Gordon operates 70 offices throughout Australia and across 12 locations in the UK, specialising in personal injury, commercial, family and asbestos-related law. The company’s business is growing nicely, particularly the successful expansion into the UK market. SGH has been a star performer since listing in May 2007, when it was the first law firm in the world to go public. The company is highly profitable and poised for strong growth.

All market cap figures are at Friday’s close and sourced from Yahoo! Finance

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.