Hobson - Small Companies, Big Profits: How To Make Money Investing In Small Companies

The book is divided into three parts:

• Part I defines what small companies are, discusses the various reasons why they are small, and considers the special characteristics that distinguish them from their larger counterparts. It looks at the ways in which small companies are traded on the London Stock Exchange.
• Part II gets down to the nitty gritty of analysing and assessing smaller companies, from where to find information to spotting the make or break signs.
• Part III has case studies showing how small companies made the grade or fell short of earlier hopes, with lessons for investors highlighted.

The accompanying website for this book can be found at:

www.harriman-house.com/smallcompanies

Rodney Hobsons personal website is: www.rodneyhobson.co.uk

Dominos Pizza isnt that a downmarket takeaway chain with accident-prone motorcyclists?

Speedy Hire a group of white van men supplying local builders who cant afford their own equipment?

Ten or 20 years ago those impressions might have been valid, but today there is a different side to these companies. Today these companies stand out as fantastic success stories as delighted shareholders will readily testify.

Dominos and Speedy are among many UK companies that started out small but ambitious. Those three dots on the Dominos logo? Thats the number of outlets it started with. Now the total is heading for 500. Speedy Hire was formed when a single outlet in Wigan took over another three in the North West. It now has national coverage with over 500 outlets and is much more than a humble tool hire company.

They are not alone. Two budget airlines that dared to challenge the world are now bigger than many of the entrenched flag carriers doomed to struggle to satisfy national pride. Ryanair and easyJet started small. Look at them now.

Stagecoach was a regional Scottish bus company inching its way forward in what had been a shrinking sector in the age of the motor car ICAP found a tiny niche acting as go-between among brokers in the esoteric world of specialist finance Bloomsbury Publishing put its faith in an unknown author called J. K. Rowling Hornby revived the dying UK toys industry Wolseley transformed itself from being a dying car manufacturer into an international building materials group specialising in plumbing equipment the list goes on and on.

The following table shows the gains that were made investing 1,000 in five small companies on the first trading day of 2001 and selling on the final trading day of 2007. This period has not been selected to inflate the figures. It includes the final two-and-a-quarter years of the last long bear market and the slump in the second half of 2007. In other words, for 40% of the period the stockmarket generally was in freefall.

These are the kind of companies that investors dream of and there are plenty more out there waiting to be discovered if you know what to look for.

It is admittedly easy to look on the companies I have highlighted with the wisdom of hindsight but in each case there were signs along the way that these companies were destined for greater things. Some make excellent case studies in Part III and we shall see that, in broad terms, they had strong management; they focused on growing markets or spotted scope for new products or services; they secured a regular long term stream of income; they expanded steadily and purposefully without over extending themselves; in short, they had a clear strategy.