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5 small caps for your watchlist

Small-cap stocks can be much more rewarding for investors willing to take on extra risk. Quite simply, it’s much easier to double a market capitalisation of $150 million than $25 billion.

Since the beginning of the year, high-yielding dividends stocks, such as Telstra (ASX: TLS) and Suncorp (ASX: SUN) have been driven higher by investors fleeing from term deposits boasting very poor interest rates in search of dividend yields above 5%.

SmallCap
Source: Google Finance

Some investors may think ‘the hunt for yield’ is over because blue chips have risen to unsustainable highs and lowered the yield on offer. However, this Fool thinks that many investors have shifted their focus from stocks like Suncorp or Telstra to higheryielding growth stocks at the small end of town.

These next five stocks pay an average dividend of 6% (plus franking credits) but investors should first understand the risks of investing in such small stocks before making a decision to invest to them. First, they can be volatile. Second, they can sometimes be very illiquid, and finally, they should occupy only part of a well-diversified portfolio because there is a real possibility investors could lose part of, or all, investments in such stocks.

Data#3 (ASX: DTL) is an information and communications technology company that offers market-leading solutions for businesses including one of the fastest growing services available, cloud services.

Every Aussie knows Cash Converters  (ASX: CCV) as that pawn shop where you can either pick up a bargain or turn unwanted goods into a tidy profit. However this Fool thinks its one-of-a-kind business model will grow and return more services to individuals especially through their finance and upgraded storefronts.

BigAir (ASX: BGL) is an exciting tech company that provides fixed wireless broadband solutions and campus environments around Australia. In its most recent full year it realised an increase in NPAT of 25%.

Despite a drop in its share price the past few months, I remain quite bullish on Integrated Research  (ASX: IRI) and its ability to deliver long-term wealth to investors’ portfolios. It is a leading Australian software company that develops and supplies performance monitoring diagnostics for computing and unified communications networks for businesses.

Last but not least is another technology stock. Oakton  (ASX: OKN) is a consulting and technology firm headquartered in Melbourne that provides IT solutions for many industries including construction, property, government, health care, resources and telecommunications.

Fundamentals

  DTL CCV BGL IRI OKN
Price $1.155 $1.265 $0.745 $0.945 $1.51
P/E 14.5 15 23 17 15
D/E 5.5% 29.3% 0.4% 0% 0%
1yr Return 11% 68.1% 41% -10.1% 16%
3yr Return 11% 35.4% 64% 49.7% -13.4%
Market Cap $178m $536m $122m $159m $135m
DPS (cents) 7 4 1 5 9.5
Book Value 12.1% 22.5% 5.2% 14.8%

Data as of 12/09/2013.

Foolish takeaway

Unlike larger companies, correctly picking one or two good small-cap stocks can be the difference between a good and great return on your portfolio. However it’s important to build your portfolio in a well-diversified manner which reduces risk. These five companies are worthy of a position on your watchlist, but investors should carefully consider the merits of each stock and whether or not they fit your investing style and risk tolerance.

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Motley Fool contributor Owen Raszkiewicz owns shares in Oakton, BigAir, Cash Converters and Data3.  

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