3 little known companies I'm watching like a hawk

Earnings season is coming and smart companies like EML Payments Ltd (ASX:EML) could surprise investors.

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I am a prolific 'watch lister'.

Companies can sit on my watch list for years on end as I watch them grow and change.

The hope is to identify when the stars start to align for a given business making it an attractive portfolio addition. I also look for changes which might increase risk and businesses to avoid.

These  risks and opportunities usually emerge over earnings season and I have singled out three companies I am watching like a hawk as we head towards August:

Ellex Medical Lasers Limited (ASX: ELX)

Ellex Medical Lasers designs and manufactures products to support eye health and there is a huge amount to like in the business; quality products, a solid history of growth, a strong forward order book, and a new factory to support the rising demand.

My big concern with owning Ellex though has always been the company's history of flimsy operating margins which leaves little margin of safety if demand drops or an unexpected cost hits the company.

These margins have been increasing over the last five years, but Ellex appears to have gone out of its way to warn the market that costs will be higher for the most recent full year as it invests in an expanded U.S. sales team, so I will want to see how these costs are tracking relative to sales growth.

Mantra Group Ltd (ASX: MTR)

Hotel operator Mantra Group stands out to me as a potential dividend stock with moderate growth prospects in the mid-term. From a risk perspective, I'll be closely watching for signs that Airbnb is eating into demand for rooms, or for indication of soft forward bookings which may impact the company's cash flow.

Trends in average occupancy ratio and average room rates will be key indicators. Both of these are normally expressed through 'average revenue per available room' or RevPAR.

EML Payments Ltd (ASX: EML)

EML Payments facilitates payment cards all over the world and falls into the 'growth prospect' category of my watch list.

The most attractive feature of the business is the payments processing system which sits at its core. It means acquisitions are easy to bolt on with minimal incremental cost and large marginal gains. This is something the company is successfully capitalising on.

I think the company could surprise when it reports and will be zeroing in especially on cash flow, which I think should be supported by growing unredeemed card credit or "accrued breakage" which has grown strongly over the last 12 months.

EML Payments is also perfectly structured to take advantage of rising interest rates on customer funds.

Motley Fool contributor has no position in any of the stocks mentioned. You can follow him on Twitter @Regan_InvestsThe 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 makes us better investors. The Motley Fool has a . This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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