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5 small caps for the next 5 years

Successful investments require three things:

  1. A good company
  2. The right price
  3. Time

Paying a great price for a good company and holding it for a certain amount of time is the best way to beat the market and start making successful investments. However, it’s important to acknowledge that investing in the stock market isn’t without it risks, although focusing on the above three requirements will minimise your chances for losses.

Over time the stock market will fall and rise but just like the lotto, you’ve got to be in it to win it. Sure, you could sit back and watch the grass grow while your money sits safely in a term deposit or interest account with 4% or 5% returns annually. However, if you had done so in the last year you would have passed up the 19.59% (not including dividends) you could have made investing in the Australian stock market.

The following graph shows the S&P/ASX 200 (ASX: XJO) over the past 12 months.

Owen

Source: Google Finance

If you thought 19.59% was good, think again. The ASX2 00 only includes Australia’s biggest public companies, therefore excluding, arguably, smaller companies that are more leveraged to growth. But it’s not too late — here are five companies that could well outperform the market in next five years.

As with most stocks in the exciting and highly lucrative software industry, Oakton (ASX: OKN) has performed well over the past year. Although it might be slightly expensive from a valuation perspective, it’s the future not the past that’s important for long-term investors (tough conditions led to a poor performance of its business throughout the ACT and may explain the slightly higher earnings ratio). Nevertheless management expect an improved performance throughout 2014 and have again increased the dividend payout ratio (currently paying a fully franked dividend around 6%). Oakton is definitely worthy of a spot on watchlists.

Energy prices are rising and many companies stand to benefit. One such small-cap stock is Sundance Energy Australia (ASX: SEA), which focuses on the exploration, development and production of oil and gas assets in the United States. For the quarter ended 30 June 2013, the company had $125.4 million cash on hand – thanks to a $48.1 million capital raising, debt of $30 million and had a daily production rate of 3,039 BOE – something the company hopes to increase to 5,000 barrels per day by the mid-2014. On the demand side of the equation, the price of oil reached a 28-month high yesterday. Sundance is worthy of a second look.

Another resource play expecting a big couple of years is Medusa Mining (ASX: MML). Medusa is a gold miner with assets in the Philippines. Currently, Medusa has a strategy to become a mid-tier gold producer (300,000-400,000 oz per year). Last year the company produced nearly 65,000 ounces at a cost of US$313/oz.

Thinksmart (ASX: TSM) is online financial services marketplace that is going from strength to strength with operations in Australia, New Zealand and Europe. After realising strong profit growth for the first half to June 30, management is expecting solid revenue growth and profit in coming months. CEO Ned Montarello said, “We have in front of us a series of opportunities which are as significant as any in our history”.

Speaking of series, Beyond International (ASX: BYI) creates and distributes television series for both Australian and international audiences. Popular names include “Mythbusters”, “Taboo”, “Selling Houses Australia”, “Deadly Women” and “Toybox”. With a market cap of only $107 and dividend of 4.0%, it won’t last long at these prices.

Foolish takeaway

These five companies each have their own unique risks but all have a considerable upside to counter it. Combining a solid upside and dividends make for a lethal investment opportunity but investors must remember to diversify their portfolio. ‘Core’ stocks should make up the bulk of holdings and should provide stability, safety and of course, a great dividend.

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Motley Fool contributor Owen Raszkiewicz owns shares in Myer.  

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