5 small-cap ASX shares sitting on a pile of cash: experts

Fears of rising interest rates have really taken their toll on growth and small-cap ASX shares.

That’s because smaller, rapidly expanding businesses are typically the ones who have taken on debt to fuel their growth.

And when a company borrows funds to operate, investors revise down its valuation as interest rates rise. This is because every dollar of future earnings will cost more to produce.

As such, during frightening times for small cap and growth shares, it could be worthwhile checking out the businesses that have plenty of cash on their books.

This theoretically means rate hikes don’t affect their future performance. If anything, it can help them marginally, as they can earn a better return on their cash.

And of course, not needing to do equity raising rounds means existing shareholders don’t have their investments diluted.

Small caps with so much cash they gave some back

In a shocking month, small-cap specialist fund Cyan C3G saw almost every stock in its portfolio suffer a freefall in June.

But portfolio managers Dean Fergie and Graeme Carson feel especially comfortable about their holdings that boast useful cash reserves.

In fact, two of those companies actually implemented a share buyback to return some of that excess capital back to investors.

“Touch Ventures Ltd (ASX: TVL) holds almost all of its current market capitalisation in cash — $74 million market cap vs $67 million in cash, plus investment assets valued in May 2022 at over $120 million!” Fergie and Carson said in a memo to clients.

“And, quite prudently, has activated an aggressive share buyback, repurchasing over 1 million shares in June.”

Despite this, Touch shares lost 24% in June.

ReadCloud Ltd (ASX: RCL) suffered even more, shaving 29% off its valuation last month.

“Digital textbook company ReadCloud holds $5.4 million on its balance sheet, made a net profit of over $1 million in 1H22 and has also announced a share buy-back.”

Price crashes don’t make sense

The memo also named three other cashed-up businesses that Cyan is keeping the faith in.

“Other companies that hold significant net cash balances include Alcidion Group Ltd (ASX: ALC) $18 million; Raiz Invest Ltd (ASX: RZI) $19 million; and Vita Group Limited (ASX: VTG) $20 million.”

The portfolio managers spoke of their angst in seeing great businesses like Alcidion and Raiz respectively lose 21% and 22% of their valuation last month.

“With Alcidion having a strong balance sheet, significant recurring revenues derived from government and private domestic and international hospitals and health care providers, there are numerous reasons to expect this stock could be a strong performer again in FY23,” read the memo.

“With almost 300,000 active and engaged financial customers in Australia, Raiz is generating strong recurring revenues and is likely to garner the interest of a myriad of local financial institutions.”

The post 5 small-cap ASX shares sitting on a pile of cash: experts appeared first on The Motley Fool Australia.

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More reading

• 2 ASX shares we’re sticking with after 60% falls: fund managers
• ‘Frustrating’: Fund backs 3 great ASX shares with plunging prices

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alcidion Group Ltd and ReadCloud Limited. The Motley Fool Australia has recommended Alcidion Group Ltd and ReadCloud Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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