3 small healthcare stocks for your watchlist

Although they've got great long-term prospects, investors need to be sure to read between the lines.

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To invest successfully, we need to objectively weigh the potential upside and downsides of a stock. Understanding the company's pitfalls is essential before committing to a buy.

Many financial reports do not dwell on the negative possibilities that surround a company's product or position in the market, so as an astute investor it's your responsibility to think objectively about what could go wrong.

Picking a good blue chip stock can be hard at the best of times, but investing in small caps has a number of added difficulties. Information is harder to come by, stock price volatility is rife and many face serious competition from bigger rivals.

In addition to market risk, medical stocks face a host of external risks that are, by definition, outside the control of the company, making growth difficult to predict and value harder to justify.

However, investing in small-cap healthcare stocks can be extremely rewarding. For example, a little over 13 years ago Ramsay Healthcare (ASX: RHC) traded for only $0.79 and could have been considered somewhat speculative. Investors who held shares in the company would now be sitting on capital gains of around 4500%, in addition to great dividends.

Here are 3 small caps to watch in coming years.

1300 Smiles (ASX: ONT)

1300 Smiles owns and operates dental businesses in Queensland and Adelaide. The company is looking to expand organically and through acquisitions. In its full year to June 30, the company experienced positive NPAT growth despite a 'deep lull' in which the company focused on operational efficiencies.

AtCor Medical (ASX: ACG)

With a market capitalisation of $27 million, Atcor has plenty of room to move and market its products throughout the world. AtCor develops and markets its SphygmoCor system which measures aortic blood pressures and arterial stiffness but focuses on simplicity and convenience for both physicians and patients. In FY 13, the company reported total revenue up 41%, global pharmaceutical sales rose 69%, Australia and New Zealand sales rose 77% and, as a result, NPAT was at its highest ever level of $2.7 million.

Vision Eye (ASX: VEI)

Vision Eye is another small-cap healthcare stock that has outperformed the market. Up 101% year-on-year, it provides ophthalmic services through eight surgeries in Victoria, Queensland and New South Wales. The company has manageable levels of debt and trades on current earnings of around 10.

Foolish takeaway

When looking at small-cap investments, focus on companies that are running on revenue, not expectations. Companies that don't have sufficient capital to market their product or expand product lines will be forced to conduct capital raisings or take on debt.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies. 

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