There was a slight problem for those looking to pick the winners for 2022, this time last year. At that point hardly any of the black swans that we are now all too familiar with, war, inflation, rising interest rates, and ultra high taxation, were on the horizon. Indeed, even if some guessed what was to come, they would only have been the people who always look for doom and disaster, and therefore were not looking for winners, but losers. Queering the pitch yet further, there has been a divergence between the blue chips and the small caps. Indeed, living up to the blue chip moniker, companies like BAE Systems (BA.), BP (BP.), Shell (RDSB) and Glencore (GLEN) all flew by more than 40%, taking advantage of being exposed to defence, oil & gas and resources in general, being sought after for obvious reasons. It seemed that the smart money was all too happy to play it safe, rather than go for “growth” stocks, which traditionally have risk and liquidity issues to overcome to get them over the line.

Boom to Bear

Another point that was illustrated in 2022 was the way that the greatest pain in the stock market is when we go from boom / bull conditions, to an illiquid bear market. This not only means that the laggards are hit, but also most galling, good companies are sold off on a “baby with the bath water” basis. Investors scrambling for cash will quite understandably sell out of the stocks where they are least under water, and which are the easiest to exit first. This means that a characteristic of 2022 has been stocks like Hvivo (HVO) being down on the year, even though the challenge trials group has announced contract win after contract win over the year.

After The Cull

So how do we navigate the 12 months ahead? The good news is that there has already been a severe culling of the small cap area. In many cases, such as Hvivo, the cull can be argued to be overdone. What we also know historically, is that when a bear market starts it is much swifter than the start of a bull market, and much more indiscriminate. However, as bear phases continue, and the dinosaurs have been eliminates, the new breed of companies that emerge can very often be regarded as being “safer” from future sell offs than they would be in a bull market. This is not only because they are vulnerable to short squeezes, but because they do not carry the overhang baggage of those investors in at the higher levels, who are always looking to sell into strength.

Rabbits Out Of Hats

For instance, Bens Creek (BEN) may be the right company in the right place, metallurgical coal, but having pulled the rug from under people long near 100p, it will have to pull several rabbits out of the hat to move from 20p back to 100p. In contrast, Harland & Woolf (HARL) had already spent the best part of three years tiring out its longs before the FSS contract news hit the newswires last month. It would seem easier for it to go from 20p to 100p, than for the same to happen at Bens – even if the latter was on fire.

Management

So the recent trajectory of a stock – especially in the past 12 months is a factor when deciding whether it could be a winner or not. This is backed by the way that companies who have managed to keep their heads above water during one of the worst periods in the past 50 years, should continue to perform. The main proviso is that there is a business there, production ongoing, or imminent, and one of the key drivers, the management know what they are doing. In many ways, the biggest casualties of 2022 have been those where the management was good for the easy money times before inflation hit, but then found itself out of its depth when the hard days dawned. Of course, there is an element of luck, Bitcoin’s fall was never going to help crypto miner Argo Blockchain (ARB), and problems in the High Street hurt Made.com, but these and other casualties of 2022 underlined the importance of preparation. This has been illustrated by the plethora of small caps going cap in hand for fundraises so close to Christmas, when they had every opportunity to do so earlier in the autumn – if they had been monitoring their bank account properly.

So the key factors for the top 20 for 2023 are:

  1. Relative performance against the stock market fall of 2022.
  2. Management strength.
  3. Being on the zeitgeist of the key economic factors such as inflation, interest rates, high tax.
  4. Having the pricing power and ability to withstand the factors described in 3.
  5. The absence of negative sentiment towards the company, with neutral sentiment actually being a positive in many cases.

20) OKYO Pharma (OKYO): 2.75p Target 7p

Given how grim 2022 was, it would not be wrong to simply regurgitate favourites from this time last year, and take the view that the only way in most cases from now would be up. However, the other problem with the bear market in small caps is that timelines have been stretched, as well as valuations kept a lid on until companies are much further down the line as far as their milestones. A good example of both delayed market response and depressed share price is dry eye treatment group OKYO. Of course, it may be the case that even after the latest announcement of clearance of its Investigational New Drug (IND) application from the FDA to initiate a Phase 2 human clinical study. What the market has perhaps still not cottoned onto are a few factors here with OKYO. The dry eye treatment market is a multi-billion dollar one, with the jump in technology with OK-101 which is a treatment, rather than current applications which mere address the symptoms of dry eyes in a mechanical way. Just as important is that because OK-101 is a topical treatment it will have accelerated FDA approval, a point underlined by this month’s news from the company. Such an accelerated approved clearly means that the costs of development are that much more economic. Finally, given the way that the market cap is back to where it was two years ago, despite the advances made, we should see a realignment in 2023, especially given the drug will be “moving into the clinic in the first quarter of 2023.

19) Polarean (POLX): 49p Target 150p

Another life sciences company Polarean, and another one which has just been given the thumbs up from The Man From Del Monte, aka the FDA. In this case, the green light is one we have been waiting on for the longest time at the medical imaging technology company with its drug-device combination product. The delay / uncertainty provides an explanation, other than stock market conditions as to why POLX shares have been on the back foot. Indeed, it was September’s request from the FDA for additional information that took the wind out of the stock at the time. Given what a rocky ride it has been for Xenoview, and how perhaps some weak hands had given up the ghost, it could very well be that we seen a meaty reaction, even between Christmas and New Year, in favour of Polarean. However, even if there is not an immediate re-rate, the breakthrough for the lung disease focused group must be regarded as transformational. The company is cashed up, $22.7m at the last count, and the relief that the New Drug Application has been successful just before the 30 December deadline is likely to maintain fundamental momentum for quite some time.

18) Baron Oil (BOIL): 0.14p Target 0.3p

Stocks like Baron Oil who have outperformed since the autumn have a special place in the stocks for 2023 top twenty. This is because, by definition, they have managed to weather one of the fiercest storms in recent times. Clearly, given the massive climb in oil over the course of 2022, Baron and its peers were always going to be looked upon favourably. But in current stock market conditions this is never a done deal. It is also usually the case, even in bullish conditions, that many stocks struggle to remain above their latest placing price, and for an extended period. Therefore, it is quite gratifying that even after the £5m raise in November at 0.12p, we are standing at 0.1425p. The timelines for the upside argument centre around Dunrobin in the first half of 2023 in terms of the CPR and potential farm in partner. Chuditch could potentially report ECRE findings and a possible JV partner early next year, with an appraisal well commitment due by June. 2024 should see drilling / spudding coming through for both. Given that Allenby are looking for a 0.775p target here, 0.30p is not only conservative, but also something which should be on offer sooner rather than latter in 2023.

17) Hvivo (HVO): 10p Target 20p

Having peaked as high as 47p early last year, it could be argued that challenge trials group Hvivo, formerly Open Orphan, has been treated rather harshly by the market. True, the peak was at the height of the pandemic, and the company was regarded by many (rather inaccurately) as being a Covid play. True, it was a beneficiary of that period, but what the company now lead by CEO Mo Khan, has shown this year is that it is company for all seasons. It is also, at a time of intense awareness of communicable diseases of all kinds, right in the box seat for its clinical trial and laboratory services. This point has been underlined by a “magnificent seven” of thick seven figure contract wins this year, something which has rather surprisingly not moved the dial as far as its share price. While one would suspect that at some point soon the dam of doubt will be burst, at least the present share price near 10p and a £67m market cap, the implication is that those arriving to the stock now see a situation where the rapid growth should feed into the valuation, and perhaps most importantly of all, sentiment. With the p/e expected to fall below 10 for 2022, and the prospect of yet more contracts, the inflection point for Hvivo shares should not be far off.

16) GreenX Metals (GRX): 33p Target 50p

Part of the “joy” of the small cap space is the search for the winning lottery ticket. While such tickets are certainly not for widows and orphans, or indeed, most of the rest of us, now and again a prospect does catch the eye. The latest situation where 1+1 may equal 11, is GreenX. Here last month we were delivered the possibility of a win at the £84m market cap company of up to as much as £737m against Poland. This is allegedly for lost profit and damages related to Jan Karski and Debiensko projects. While there was no timeframe for this potential windfall to hit the GreenX bank account in November’s RNS, one would assume that the window of the whole of 2023 could be enough to deliver some news significant enough to move the dial. Rather tellingly, in a market wish is quick to erode any share price gains, shares of GreenX have stretched to maintain year highs nearly a month later.