Apoloigies (again) for a recently quiet SmallCaps.co.za, but I've just come back from a Cape Town visit to many of the institutions. Many of the fund managers appear to remain cautiously optimistic on the market and some are quite bullish on stock picking and opportunities in the small cap space. Defensive counters appear to still be attracting a lot of attention, but value and stability (i.e. will the business still be here in 5 years time) are common themes too.

With the continuing resounding success of EOH in stark contrast to the collapse of Gijima, the technology space is quite intriguing. What I also quite like in it is that all the locally-listed tech counters actually count as small cap stocks. So, as a small cap analyst, I can actually cover the entire sector.

Now, my understanding is that SITA (public sector) spend continues, but with a bias towards SMME and empowered tenders. This is quite significant, given that SITA is about a quarter of the local tech market's spending and its preference for supporting small business is likely (at least partly) the reason why many of the big listed tech group (Datacentrix, Gijima, Business Connexion) have reported margin collapse and woes in their hardware segments (that traditionally were built out of SITA tenders).

Telecos also appear to be spending in tech, but the current shortcoming of the market is the banking sector (c.20% of the local tech spend, of which Standard Bank is c.40% of the banking sector's tech spend). The banking sector is apparently retrenching IT staff every second week and has all but frozen its related tech spend. Just a glance at ISA's disappointing H1:13 results (as it is the tech counter with the largest % banking exposure in its revenue base) reveals how tough the banking sector tech spend part of the market has become.

Technology is inherent in banking these days, so I don't expect that the banks can keep holding back on ICT spend indefinitely.

So, all in all, which tech counters show promise?

Enter my favourite visual representation of stock picks: the risk-reward matrix (basically, a visual 'Sharpe Ratio').

(Click to enlarge image in a new window.)

Note, that I haven't had time to update the implied return for ISA after its H1:13 results, but I expect the 12m TP to not drop to aggressively... Also, despite an expected drop in 12m TP, ISA's share price has also come down some 17% in the last month, so the implied return may actually go up!

That said, one can easily see why I don't like EOH, DCT, DTC and GIJ, and why I think that BCX and BLU may perform relatively well against their peers (I still count BLU as a 'tech company' because of the inherent technology-based IP in the Group.).

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