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3 small caps tipped to be this reporting season’s superstars

The looming reporting season will be a nail-biting event for investors as an uncertain outlook for many sectors and high valuations will leave many stocks primed for a sharp sell-off if management fails to meet bullish expectations.

This could be particularly true for small cap stocks as they are far more exposed to the domestic economy compared with their big cap brethren. The Australian economy is growing below trend as consumers appear to have gone on strike on the back of weak wage growth. In contrast, other major economies like the EU, the US and even China seem to be on firmer footing.

This could partly explain why the S&P/ASX Small Ordinaries (Index:^AXSO) (ASX:XSO) is lagging the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) since the start of the calendar year by 1.3 percentage points as we head into the profit reporting season.

The scene is set for large caps to outperform the small end of the market in August, although investors shouldn’t write off small caps. In fact, Macquarie Group Ltd (ASX: MQG) has highlighted three small stocks it has a “buy” recommendation on that are well placed to be this profit season’s heroes.

The first is 3P Learning Ltd (ASX: 3PL) as the online education company is well placed to beat management’s guidance. This is despite a seasonably higher cost base for marketing, commissions and employee bonuses that typically occur in the second half of the financial year.

The broker is expecting double-digit earnings per share (EPS) growth for FY18 that is driven by cost reductions although the market will be increasingly focused on subscriber growth.

The second is IDP Education Ltd (ASX: IEL), which provides placement services for international students looking to study in Australia, the UK and US. Macquarie is confident it will deliver a solid FY17 result that is underpinned by favourable industry dynamics with management well positioned to produce another solid result in the current financial year.

“We are forecasting double digit EPS uplift in FY18 underpinned by strong underlying organic growth, foreign exchange benefits, contribution from the acquisition of Hotcourses and improved yields on university contracts,” said Macquarie.

Last but not least is Bravura Solutions Ltd (ASX: BVS). The investment software company may have rallied 27% over the past year to $1.59, but the stock is still trading on undemanding multiples, according to the broker.

What’s more, Bravura has won a string of new clients in the UK and South Africa, which will underpin earnings growth in FY18, if not beyond.

“The revenue opportunities from new and existing clients underpin our FY18 earnings forecasts. The company has strong cashflow conversion and is past peak product investment cycle,” added Macquarie.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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