Are SA Small Cap stocks currently undervalued?

Small and mid-cap enthusiast and Fund Manager at Alpha Wealth, Keith McLachlan, believes that South African small cap stocks are currently undervalued, contrary to their US counterparts which are said to be overvalued. The Johannesburg Stock Exchange (JSE) has been relatively flat this year, excluding a few outliers like Naspers and Richmond. The small cap market has suffered due to a recession and a sovereign downgrade, leading to liquidity drying up. Many small cap stocks have seen significant declines of up to 50% in the past year, despite their earnings holding up well. This has created an opportunity for investors looking for undervalued assets in the market. The past performance of the small and mid-cap index reflects this underperformance, with negative returns to date. However, over the long term, this part of the market has historically outperformed the all share or top 40, with average returns ranging from 15 to 25 percent annually. While short-term challenges persist due to weak economic conditions and political uncertainty, many small cap companies are starting to internationalize their operations, diversifying their revenue streams and reducing their reliance on the South African market. McLachlan highlighted a few small cap companies that he believes hold significant value for investors. Blue Label Telecoms, known for its South African distribution network, has seen recent growth opportunities with its Celpay investment. McLachlan views Celpay as deeply undervalued, especially with a lucrative roaming agreement with Vodacom. Santova, a non-asset supply chain manager, stands out for its scalability and offshore earnings, making it an attractive investment with a low price earnings ratio. Adapt IT, a software solutions provider, has shown resilience despite softer growth rates, with a strong recovery in the second half of the year. Metrofile, a document storage solutions provider, offers a defensive investment opportunity to profit from the increasing demand for document storage in a regulatory environment. With a high dividend yield and attractive price earnings ratio, Metrofile presents a compelling investment case. Master Drilling, a global player in the drilling industry, boasts a dominant market position and a strong track record of profitability. Overall, McLachlan's analysis suggests that South African small cap stocks present a buying opportunity for investors looking for long-term growth potential. Despite short-term challenges, these undervalued companies have the potential to outperform broader market indices, offering attractive returns for savvy investors.