The Motley Fool

4 micro-caps with massive potential

We’ve all heard the story of how an investor found a company which almost instantly turned her into a millionaire. Whether it was a commodity power play, explorer or tech start-up – personal fortunes have been made or lost on micro-cap stocks.

I hate to tell you, but you’ll never achieve dream-like returns buying blue-chip stocks like Commonwealth Bank of Australia (ASX: CBA), Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS). Searching for dividend yield is the ultimate conservative investment strategy.

There is a time and place for diversification and risk-averse investing, but the risk-reward law of investing tells us you’ll never truly ‘win big’ without buying a lottery ticket and accepting it’s potentially all or nothing.

I’m a firm believer that if you are in the growth or “accumulation” phase of your working life you should be focused on finding small or mid-cap stocks with growth potential rather than income plays.

If your timeframe is 20 years or more, I don’t believe it’s unreasonable to have 60% of portfolio invested in “growth” stocks. The market has proven time and again it’s smarter to invest in growth stocks over high yields if you’ve got a long-term mindset.

Growth doesn’t mean speculative. There’s a big difference.

Finding established businesses is crucial – whether small or large – it’s important the business model and balance sheets are in your favour. Some investors will take free cash flow and generous bank balances for granted without assessing costs of exploration or research and development – it’s a quick way to put a black hole in your profit and loss.

The next 20 years

Exportable commodities – I’m not just talking about the stuff we dig up – should be a central theme to long-term investors’ portfolios. Healthcare, biotechnology, resources and education are – and will be – vitally important to global markets.

Companies like CSL Limited (ASX: CSL) and Resmed Inc (ASX: RMD) prove Australia still has a competitive advantage in something. Take note.

Motley Fool analyst, Mike King, highlighted that many of the big healthcare stocks are terrific businesses although many are already fully valued. However, he acknowledged: “There are still plenty of fish to shoot in the healthcare barrel.”

I couldn’t agree more.

My top stock for October was ADMEDUS FPO (ASX: AHZ), which in just over four months has risen 200%, but I don’t believe it’s done yet. At $0.17 per share I still believe there is considerable upside, particularly since the company is yet to recognise any significant sales of its Cardiocel technology which recently gained European and FDA approval.

Tiny software developer Global Health Limited (ASX: GLH) also derives its earnings from the healthcare sector. Its ambition is to provide innovative communications solutions to medical professionals including psychologists, GPs and more. It was my top stock for January and despite recognising gains of around 800% in 2013, has since risen 36% on a decent half-yearly report.

Here today, gone tomorrow

Technology continues to pervade our lives. The future will be more connected, yet simpler than we can imagine today. Warren Buffett – arguably the greatest investor ever – knows simple business models are an investor’s best friend.

Adslot Ltd (ASX: ADJ) provides a seamless process for advertisers on digital content. Adding online marketing to your business’ advertising strategy is as simple as picking a target audience and putting it in your shopping cart. Watch out for this one.

Money-rich, time-poor

When it comes to speculative investments. Waiting is what gets the better of most people. Whilst your friends lap up dividends or go out and buy expensive toys, you’ll have to be content with your stock picking ability and wait patiently.

But not with this stock. Liquefied Natural Gas Limited (ASX: LNG) is a junior gas explorer which has its flagship Magnolia project in the heart of US gas country, the Gulf of Mexico. If it stays at $0.33 per share, it will be the next company to enter my portfolio but I know time is against me because this company continues to produce promising results and announcements.

Foolish takeaway

Finding that next big thing isn’t as easy as it seems, so it’s important to keep your eyes peeled for new ideas and divvy-up your speculative punts. Although these top growth ideas could be extremely rewarding, it’s important to build a stable core group of companies you can rely upon, before taking on such high risk investments. With micro-cap stocks you shouldn’t invest more than you can afford to lose.

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Motley fool Contributor Owen Raszkiewicz owns shares in Admedus.  

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