Australia's small-cap marketplace remains largely underserved by research houses and, as a result, investors.
That means for savvy investors willing to look hard enough, there is considerable upside potential if you buy in before the market catches on. However as every seasoned investor knows, it's important to do your research because small-cap stocks can be illiquid, extremely volatile and face considerable risks.
Although there are many risks facing small medical stocks, three that I believe hold great potential are Capitol Health (ASX: CAJ), AtCor Medical (ASX: ACG) and Allied Healthcare, recently rebranded Admedus (ASX: AHZ). In the past year, the companies are trading much higher, up 357%, 126% and 594% respectively. Although they have bright futures ahead, each face unique risks.
Two technology companies (although extremely different kinds of technology) that could provide a big upside for investors are Quickflix (ASX: QFX) and Newsat (ASX: NWT).
Quickflix provides on-demand streaming of movies to network capable devices like PCs, laptops, mobile phones and tablets. Recently it signed a deal to pre-load its app on Amazon's Kindle Fire HD tablet, which provides a huge marketplace to bring awareness to the company.
Newsat is a satellite communications company that already has a number of orbital slots over Asia and Africa ready to be used as part of its Jabiru satellite development program. With a successful launch, Newsat's earnings will go sky-high.
Lastly, I think Cash Converters (ASX: CCV) is one undervalued stock. It has recently dropped back to $0.85, which is very low considering its growth potential. Although new credit rules have disrupted the value of its Australian loan book temporarily, Cash Converters is a great long-term play with a reliable 4.8% dividend.
Foolish takeaway
Any well-diversified portfolio will contain a number of small- or micro-caps as part of the strategy. Depending on your risk tolerance and investment timeframe however, you may be less likely to take on the risk of such small companies.
