Most investors will allocate the majority of their investment funds to dependable blue chip stocks, such as Telstra Corporation Ltd (ASX: TLS). Reserving a small portion of your portfolio for small-cap stocks, which have high growth potential but admittedly are further up the risk-curve, can be one way to position your portfolio to outperform.
Two industries which hold particular appeal in my view, when searching for high growth small-cap stocks, are the biotechnology and information technology sectors.
As the recent price action of previous market darling Acrux Limited (ASX: ACR) reinforces – potential high growth stocks are not without risk. Acrux's share price has fallen 43% in the past month and 74% in the past year, as investors have become increasingly nervous about its potential to succeed.
However, when an investor "gets it right" they can get it very right indeed! Take Sirtex Medical Limited (ASX: SRX) for example. The share price is up 51% in the past year and up 398% in the past five years, taking it from small-cap land well into the mid-cap space, with a current market capitalisation of nearly $900 million.
While biotech stocks can certainly provide wonderful rewards, investors can have a hard time understanding the science behind them. In contrast, tech stocks can sometimes be easier to gauge.
Take for example the $408 million iProperty Group Ltd (ASX: IPP) and the $210 million iCar Asia Ltd (ASX: ICQ). The business models and technology underlying these two firms, is easy to understand. They are following in the footsteps of two companies – REA Group Limited (ASX: REA) and Carsales.Com Ltd (ASX: CRZ) – which just a few years ago were small cap stocks, but today boast multi-billion dollar market capitalisations.
While a 'copy-cat' strategy certainly doesn't guarantee success, the opportunity to mimic their success in Asian markets has obvious growth potential.
Given the chance, who wouldn't go back in time and buy shares in REA and Carsales? Unfortunately investing doesn't have a crystal ball, but that hasn't stopped plenty of investors enjoying long-term success.
