Here at The Motley Fool we have a simple investment philosophy: Buy good companies at the best prices today and hold them for long-term gains.
Regular investors will buy good stocks at OK prices but time has shown if you follow the crowd, you'll only ever get the same returns. We want something better.
It's our job as 'savvy' investors to identify future opportunities that the market has either got wrong or hasn't realised yet. Currently, much of the market is focused on stocks inside the S&P/ASX 200 (ASX: XJO) (^AXJO) and little attention has been given to stocks further down the peaking order.
'Mum and Dad' investors have been drawn to strong dividend yields and reputable names as interest rates have fallen but no stock is a buy at any price and, despite what many would have you believe, the big banks aren't safe places to invest your money.
Small-cap stocks present opportunities for investors to make huge capital gains in the long term, provided they understand the inherent risks of investing in such small companies. Here are 10 exciting small companies that I believe have a lot growth potential for long term investors.
Technology
Technology is booming and will continue to pervade our lives as our world becomes more interconnected every day. Three companies that come from vastly different backgrounds are Ebet (ASX: EBT), BigAir (ASX: BGL) and Newsat (ASX: NWT).
BigAir provides wireless solutions to campus and business environments throughout Australia and, despite facing increased competition from companies like TPG Telecom, will continue to grow and return to shareholders. Ebet provides gaming systems and networked solutions in Australia and Asia and has a massive scope for growth, although investors should be patient. Newsat is Australia's only pure play satellite company and has a number of orbital slots for next generation geostationary satellites. Keep your eyes on this one.
Resources
Resources stocks will soon be in the spotlight once again. However these two established businesses remain in the dark. BC Iron (ASX: BCI) is a junior iron ore miner that pays great dividends and is cheap. Tassal Group (ASX: TGR) is a resources company of a different kind. It provides Atlantic salmon from its operations in Tasmania. It has a great track record of returning to shareholders and Morningstar is forecasting strong EPS growth until 2016.
Diversified financials
IMF Australia (ASX: IMF) is a Sydney-based provider of funding for legal claims in both Australia and the USA. It has a very strong record of supporting successful cases and despite its lumpy earnings pays a great dividend. Yellow Brick Road (ASX: YBR) is a junior wealth manager and is headed by entrepreneur Mark Bouris. Although it is yet to turn a profit, the next 10 years are looking increasingly bright for this diversified finance company.
One stock that has recently taken an irrational setback in share price is Cash Converters (ASX: CCV). Currently trading at 95 cents, it's a bargain, considering its long-term growth potential and 4.7% dividend.
Healthcare
Allied Healthcare (ASX: AHZ) was my number one stock for October and has since climbed over 55%. As with most healthcare stocks it is heavily regulated and faces a number of risks unique to the industry. However its recent stock rally and oversubscribed rights issue proves that it's ready to go to the next level for shareholders.
Lastly, Vision Eye Institute (ASX: VEI) has a view to strong growth ahead. It operates state-of-the-art day surgeries and refractive and laser eye surgery centres throughout Australia. It is trading quite cheap and has a market capitalisation of only $111 million.
Foolish takeaway
Peter Lynch was a superstar fund manager and investing guru who was notably for his most successful investing strategy, "invest in what you know." His strategy was simple yet extremely effective. He turned the Magellan Fund from a measly $18 million into $14 billion in 13 years and said, "The person that turns over the most rocks wins the game."
There are many small companies listed on the ASX and it's our job to turn them over and understand what they have in store. We can't just randomly choose stock tickers and hope for the best. It's important that we understand and consider the consequences of investing in such small companies, like those above, and pay particular attention to who's leading them because they are fragile and can be extremely volatile.
