There is a good reason billionaire investor Peter Lynch advocates investing in small-cap stocks. They often fly under the radar of bigger investors due to their small size and limited liquidity, but many have outstanding prospects and could one day become the next big blue-chip held in every portfolio.
Not all small-caps are created equal however. The growth and innovation displayed by the following four companies suggest they may have the potential to be tomorrow's blue-chips:
Somnomed Limited (ASX: SOM) manufactures a breathing device called SomnoDent. The product is a mouth-guard style adjuster which opens a patient's airway and prevents obstructive sleep apnea. It is a cheaper alternative to CPAP machines offered by the likes of ResMed Inc. (ASX: RMD) and taps into a huge potential market.
The company's revenues have growth at a compounded annual growth rate (CAGR) of 41% since 2006 and gross margin has grown at 50%. Somnomed is aiming for more growth in the U.S. and in Europe going forward.
Cloud focused, e-healthcare company Global Health Limited (ASX: GLH) also has many of the ingredients to become a large global company working with hospitals and care providers. Global Health had a great first-half result and is targeting full year NPAT growth of between 53% and 74%.
Resort and casino operator Donaco International Limited (ASX: DNA) is on track to significantly increase revenues and profit when it launches its new 428-room hotel in Vietnam in May. First-half adjusted NPAT grew 21% ahead of the launch and the company increased its ownership stake in the joint venture to 95% which will increase its return.
Finally, My Net Fone Limited (ASX: MNF) is on a path to become a new generation of telco. The company provides a Voice over Internet Protocol (VoIP) service which involves converting analogue voice signals to digital signals to send them over the internet, allowing almost free international calls. My Net Fone's revenue for the first half of 2014 was up 55%, while NPAT jumped 58%.
Foolish takeaway
It can be easy to forget that the majority of well-established blue-chip stocks were once small-cap companies bursting with growth. These four companies may be small, but with continued growth and innovation they could become the next ResMed, Crown Resorts Ltd (ASX: CWN) or Xero (ASX: XRO).
