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3 cheap small caps

Although the S&P/ASX Small Ordinaries Index (ASX: XSO) may have underperformed the S&P/ASX 200 Index (ASX: XJO) (^AXJO) over the past year, things are looking up for small-cap stocks.

Since the beginning of 2014 their return has nearly doubled that of the largest 200 companies.

Source: Google Finance

The smallest companies on the ASX remain under researched and as a result, under invested. Recently we’ve witnessed some big profits come from smaller companies due to increased consumer and business confidence.

So what stocks look good at current prices?

As always, it’s important to buy companies when they’re down and out. That is, before the market realises their potential or when they suffer a fall in price. One company which recently took a beating is Cash Converters International Ltd (ASX: CCV). Cashies’ share price has fallen as a result of a number of external headwinds such as changes to lending conditions on small loans. In the short term these changes have affected the extremely profitable Australian business, but the company will overcome the new rules and continue to be a great growth prospect.

Cashies continues to grow its store count and international presence throughout the UK and more recently New Zealand. Its Carboodle business is also showing extremely promising signs, notching up significant revenue growth in recent months. It pays a strong 4.1% fully franked dividend.

Another small-cap which hasn’t got a mention in investors’ portfolios is Collins Foods Ltd (ASX: CKF). Collins Foods owns KFC and Sizzler restaurants throughout Australia and Asia and has recently invested in an up-and-coming fast casual dining chain known as Snag Stand. The company released a report on Friday stating it continues to experience tough growth with its Sizzler chain, but it recorded promising increases in sales through its KFC chains. Management are however committed to innovative marketing and product offerings through both restaurants and, in my opinion, will overcome the short-term headwinds.

Earnings will this year come in at management’s guidance with around $17.3 million in attributable profit that will likely grow in coming years as the company benefits from the increasing store count and acquisition of Competitive Foods in Western Australia. It pays a succulent 4.6% fully franked dividend. Yesterday’s drop in price presents an opportunity for long-term investors.

Another business serving up potential for growth in dividends and capital gains is Tassal Group Limited (ASX: TGR). The company has a market capitalisation of around $527 million and a 10-year annual total shareholder return of 17.8%. It recently changed the focus of its customer base from volatile international markets to local households. It plans to increase consumption per capita via innovative offerings.

To its credit, it notched up profit growth of 42% from its strategy when it announced its results last week. It also lowered gearing by 27% and increased its operating cash flow by 30%. It might smell like a fishy growth strategy but it works!

Foolish takeaway

As investors went after dividend-yielding blue chips in 2013, I slowly transitioned my portfolio to reap the rewards of the next wave of growth. Small-cap stocks have underperformed the market in the past 12 months but things are looking up and confidence is returning to markets. Put these companies on your watchlist, do a little research and make your mind up as to whether, or not, they fit your long-term investment strategy.

These 3 stocks could be the next big movers in 2020

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Motley Fool Contributor Owen Raszkiewicz owns shares in Collins Foods and Cash Converters.   

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