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3 small caps that should be on your watchlist

Businesses with small market capitalisations have the best chance of beating the market simply because of how much room to grow they have.

Small caps may be a little riskier or more volatile than blue chips but I think they are well worth the risk. Here are three of my favourite small caps at the current prices:

1300 Smiles Limited (ASX: ONT)

This is one of the largest dentist businesses in Australia. It has created a successful business of acquiring dentists and adding them to its network.

1300 Smiles has also come up with a clever strategy of creating recurring revenue and potential for more earnings on top of that. It has a $1 a day plan for clients who wish to sign up for affordable annual care.

The business may not have as defensive earnings as Ramsay Health Care Limited (ASX: RHC) but it still has quite defensive earnings.

1300 Smiles is currently trading at 23x FY16’s earnings with a grossed-up dividend yield of 4.45%.

Pureprofile Limited (ASX: PPL)

Pureprofile is an up and coming market research company providing important information for businesses. Users are paid to take surveys on various topics, then Pureprofile presents this information to the business for its management to decide what to do with that information.

Data on customers is becoming increasingly important in this era to understand what consumers think and like or don’t like. A business will get to learn if it’s onto a winner (or loser) with its latest product or advert based on the research responses.

Pureprofile isn’t yet making a profit or paying a dividend.

Capilano Honey Ltd (ASX: CZZ)

Capilano is the ASX-listed Australian honey producer. The share price has seen tough times over the last year going from $22.55 to a low of $13.93. However, the shares have buzzed higher and it has recovered up to $16.77.

I wouldn’t allocate a large portion of my capital to Capilano but it could be a good way to diversify your portfolio

Capilano is currently trading at 15x FY16’s earnings with a grossed-up dividend yield of 3.41%.

Foolish takeaway

I think all three of these small caps could beat the market quite easily over the next five years. Of the above three, Pureprofile is my favourite due to its industry-leading operations but the other two are attractive because they already pay dividends.

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Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia owns shares of Capilano Honey Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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