In the long run 'growth' companies produce a better total return than 'income' companies. On top of that, small companies grow more than large companies, simply because there's more room to grow due to their smaller size.
This means that small companies have the best chance of beating the market average return.
Here are three small cap companies I think that could outperform the market:
National Veterinary Care Ltd (ASX: NVL)
National Veterinary Care is a recently listed vet business with a market capitalisation of $88 million.
Quite a number of its management are former Greencross Limited (ASX: GXL) employees. If they achieve similar growth to what Greencross achieved, National Veterinary Care could be in for a great few years. The number of pets is rising as the human population increases, so revenue at each vet should increase faster than inflation.
The National Veterinary Care share price has grown by 59% from August 2015 which could be just the start.
It's trading with a price/earnings ratio of 18.3 and isn't paying a dividend, but is expected to from FY17.
Nearmap Ltd (ASX: NEA)
Nearmap is an image mapping service in Australia and the USA, with a market capitalisation of $242 million. It's been through troubled waters recently sending out confusing messages about doing a capital raising.
It has gotten through that rough patch, but its share price has dropped 20% since 18 November 2016. However, the share price has grown 61% over the last 12 months and I think it can grow further.
The services that Nearmap offer will likely become more popular as people want to remotely monitor construction projects or survey areas. In FY16 it grew revenue by 28.8% to $31.3 million.
Nearmap has been making losses and doesn't pay a dividend yet. As it captures more clients and revenue, profits could grow substantially once it isn't spending as much of its revenue to grow the business.
Freelancer is the global online portal to hire freelancers for projects. It has a market capitalisation of $478 million. It connects people looking for help for a project, with people willing to give the help. It could be as simple as designing a logo or a Microsoft Excel project.
The more projects that are done through the job portal, the more revenue that Freelancer receives. In the first half of FY16 Freelancer increased net revenue by 56%.
FY16 was also the first time that operating earnings before interest, tax, depreciation and amortisation was a positive figure at $0.1 million. Freelancer increased its operating cashflow by 409% to $4.5 million.
Freelancer has been making losses and doesn't yet pay a dividend. Freelancer could turn into a large global company if it manages to keep growing the number of projects and users on its site.
Time to buy?
It's a difficult time for growth stocks at the moment, the potential Fed interest rate rise is harming share prices.
Of the three companies I like the concept of Freelancer the most, but I think National Veterinary Care will be the best investment over the next few years.
When National Veterinary Care starts paying a dividend it will be an added bonus, which may make it one of the best income stocks over the coming decade.
