Vocus Group Ltd (ASX: VOC) shares, Catapult Group International Ltd (ASX: CAT) shares and Gentrack Group Ltd (ASX: GTK) shares are near the top of my buy list.
Why small caps?
Since I invest in international markets, I consider any company with a market capitalisation (share price x the number of shares) less than $2 billion to be a 'small cap'.
Typically, small cap companies are under-researched by professional analysts, which makes it easier for ordinary investors like you and me to stumble across undervalued opportunities.
What's more, many of the best small cap companies are leaders in a niche industry or market, so we do not have to sacrifice on quality like some 'professionals' would have us believe. Indeed, there are many promising businesses operating near the small-cap end of the market.
Here are four companies near the top of my buy list.
1. Vocus
Vocus is a $2.3 billion company, so most investors wouldn't call it a 'small cap'. It is the telecommunications company behind names like Dodo, Eftel, Primus, Commander and more.
Earlier this month, Vocus received a takeover offer from private equity firm KKR for $3.50 per share, which you can read more about here and here. KKR's offer follows a disastrous year for Vocus's shareholders, with shares down from over $9. I expect Vocus' board to reject the offer, given the quality assets on its balance sheet.
2. Catapult
I recently wrote in-depth about Catapult Group here. I think the small-cap, Melbourne-based sports technology business ticks many boxes for long-term investors. As one of my favourite fund managers described Catapult, 'it has multiple ways of winning'.
Catapult has developed GPS devices that are used by professional — and, increasingly, semi-professional — teams around the world to monitor player endurance, injury and gameplay. The company also has a growing video analytics business, which can be used by broadcasters.
3. Gentrack
Gentrack is an NZ$390 million company, specialising in software used by airport operators, energy and water utilities. For me, Gentrack ticks many boxes because it is a relatively defensive business — with a 2.4% dividend yield — and boasts compelling growth opportunities abroad, especially in Europe.
4. Pinnacle Investment Management Group Ltd (ASX: PNI)
Pinnacle Investment Management is a funds management business that takes ownership stakes in businesses run by professional investors. They provide the support to help the businesses grow their assets under management and complete all the 'back office' functions, such as maintaining compliance and filing investor information like fund fact sheets and performance reports.
You can read more here.
Is it time to buy in?
At today's prices, I think Vocus and Catapult could be decent value for investors focused on the long-term (five years) — however, you must have thick skin for the heightened amount of volatility that can be expected.
Pinnacle is a good business with compelling economics, yet I cannot help but think that having patience will reward investors with an opportunity to buy its shares cheaper at a later date.
Finally, Gentrack is a good company but its shares have run quite hard in recent times. Nonetheless, if you are willing to look past any short-term jitters, I think it will be a compelling business to own over the next decade.
