3 small caps with a bright future

With the ASX All Ordinaries (ASX: XAO) reaching 12-month highs it is becoming increasingly difficult to find value investments. Most sectors have price-to-earnings ratios at or close to historical highs and while there are some great yielding stocks, there are few with compelling growth opportunities.

However, the ASX Small Ordinaries (ASX: XSO) has underperformed against the S&P/ASX 200 (ASX: XJO) and could represent the value many investors are looking for.

Here are my top three suggestions in the small-cap space:

1. Newsat Limited (ASX: NWT)

Newsat is Australia’s largest pure-play satellite communications company. Newsat is about to complete a long journey from a satellite solutions provider & teleport operator to global satellite operator. Most importantly for investors, the margins achievable through these stages increase significantly from 10% as a solutions provider, to 75% as a satellite operator upon the launch of Jabiru-1 expected in 2015.

Newsat has the financing required and has already signed $618 million in prelaunch contracts. While the share price has rallied recently from $0.33 to a high of $0.56, the potential upside of this investment is significant.

2. Mincor Resources (ASX: MCR)

Mincor owns and operates a number of nickel mines in Western Australia. There has been little joy for any miner operating in the nickel sector, with the commodity price remaining at five-year lows.  The Warren Buffett school of investing would suggest that with all the buyers running far away from nickel sector, this could be a time to buy and wait patiently for a recovery.

Mincor management has a history of looking after its shareholders, it pays out dividends at any viable opportunity and is reluctant to issue new capital. Mincor has a healthy balance sheet with no debt but plenty of cash. This is reflected in the company’s 2013 financial accounts, which highlighted a net tangible asset per share of $0.61 cents. An investment in Mincor is a gamble on the nickel price, but if the nickel price does trend upwards there would be not better place to be.

3. Shine Corporate (ASX: SHJ)

Shine is the third largest plantiff litigation firm. Since its recent listing its share price has moved in the range of $1.50-$1.80 on low volumes. Yesterday the board confirmed the profit guidenace for the 2013/2014 financial year of $21.3 million after tax, a 21.5% increase on the corresponding period.

I take comfort from the performance of another listed legal provider, Slater & Gordon (ASX: SGH). Since listing, Slater & Gordon shares have moved from $1.60 to a recent high of $4. Shine Corporate is trading with a price to earnings ratio of 13 versus Slater & Gordons price to earning ratio of 16.

While management has had little opportunity to prove itself to date, it has been able to meet guidance provided upon listing, something many recent listings cannot claim. People will always need lawyers, and Shine Corporate should continue its impressive growth rate through organic growth and continued acquistions.

Foolish takeaway

Small-cap stocks are inherently higher risk than investing in a larger established company. However, they can be a great way to add diversification and growth into your portfolio when value cannot be found elsewhere. Remember BHP Billiton (ASX: BHP) was once a small cap.

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Motley Fool contributor Tim Roberts doesn’t own any shares in any of the companies mentioned.

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