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4 small caps with potential

Investing comes with few sureties, but one thing we can all agree upon is that the bigger the risk, the more reward we expect. Buying companies that are the giants of their industry and well-known by every investor and the general public aren’t going to be as risky as smaller, lesser-known companies. However, small caps have the possibility to impress investors who are willing to take on the extra risk.

Here are four small caps with the potential for a huge upside.

Software and IT are almost irreplaceable to both business and consumers. Companies at the forefront of technology give an investor the potential to make huge returns on their investment. Integrated Research (ASX: IRI) supplies and develops performance monitoring, diagnostics and reporting software for business-critical computing and Unified Communication Networks. They pay a 4.8% fully franked dividend and have a great long-term upside.

IMF Australia (ASX: IMF) finances and supplies legal services to both Australian and US firms who wish to take on cases exceeding $5 million. They carefully assess and analyse cases brought forward and fund litigation in return for a fee. They are a stable, long-term prospect and pay a 5.3% fully franked dividend.

Overseas markets provide platforms for Australian businesses to generate huge revenues and profits. Jumbo Interactive (ASX: JIN) is an online lottery business that has recently signed agreements with major US retail chains to provide lottery promotion programs for rewards designed to increase sales of lottery tickets. Jumbo has had a consistently high average return over many years and pays a fully franked dividend.

The last company is considerably bigger and well known by many investors and consumers. Cash Converters (ASX: CCV) has had healthy trendlines for the past two years, increasing some 150%. However, analysts believe it’s not over yet and Morningstar predicts EPS will increase by an additional 50% by 2015. Despite its massive growth potential, it’s currently priced very well and paying a healthy 3.1% yield.

Foolish takeaway

Small cap stocks experience more volatility and sometimes, trades are few and far between. It’s important to diversify your wealth across different asset classes, but also across different stocks, industries and even markets.

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Motley Fool contributor Owen Raszkiewicz owns shares in IMF Australia.  

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