Investing in small companies requires seemingly endless research. But it can be extremely rewarding. Scouring through hundreds of potential up-and-comers usually takes a team of analysts a long time to complete and there's no guarantee you'll find what you're looking for.
Although speculative investments should only make up a very small portion of risk-averse investors' portfolios, I know many seasoned investors who dedicate a majority of their holdings to high reward investments. However it's not an advisable allocation of resources. When investing in these types of stocks, a basic rule of thumb is don't invest what you cannot afford to lose.
The first small-cap stock which has recently caught my attention is TZ (ASX: TZL). TZ develops intelligent and smart device systems through Telezygology Inc. In recent years the company has suffered since the loss of its tender for the Australia Post contract, but it seems in 2014 it's all or nothing for senior management, and so far, so good. In the past few days they have made a number of promising agreements with international clients, which might be an indication they'll have the "extraordinary growth" year they need.
Another company which is hoping to innovate its way to success is Adslot (ASX: ADJ). It is an online marketing company looking to revolutionise the way advertising is undertaken by making the connection between buyers and sellers much more efficient. More than $100 million has been transacted on Adslot's platform and it has clients like REA Group (ASX: REA), eBay Australia and Wotif (ASX: WTF).
Technology stocks have proven to be extremely lucrative investments in recent years and investors worldwide are paying top dollar for innovative ideas. Global Health (ASX: GLH) is one company which is looking to bridge the gap between medical professionals and their patients. Quickflix (ASX: QFX) is an online movie streaming and DVD rental service which has recently seen a boost in the amount of paying subscribers – perhaps a sign of things to come. Both face enormous risks but are likely to grow revenues strongly in coming years and are worthy of further research.
Lastly, Admedus (ASX: AHZ) – formally Allied Healthcare – was my top stock idea for October and is, in my opinion, still worthy of investor attention. Since that time the stock has risen 85% because of the likelihood its CardioCel technology will bring strong earnings from sales worldwide.
Foolish takeaway
Small-cap stocks can be extremely high risk and sometimes illiquid. It's important investors conduct rigorous analysis and fully appreciate the internal and external challenges faced by companies before committing to a purchase. It can take a long time for these stocks to reach maturity or rebuild from a low in their share price and they normally don't pay dividends.
