According to the 2013 Zenith Small Companies Sector Review small-cap managers outperformed the S&P/ASX Small Ordinaries Index (Index: ^AXSO) (ASX: XSO) on average by 18% in 2013. A major cause of this outperformance was managers who held underweight positions in resource stocks – a sector which experienced a very difficult 2013.
Zenith's results also highlights the significant "value add" which can be accomplished by stock picking and particularly by avoiding losers. Another advantage of focusing on smaller companies is their potential to grow revenues and earnings at much faster rates than larger, more established firms.
The following three firms all have exciting products and businesses which appear to be at inflection points that could see them grow substantially in the next few years.
1) Newsat Limited (ASX: NWT) was listed on the ASX in 1999. In 2005 the company acquired Australian land-based teleport assets in Perth and Adelaide. In 2011 Newsat acquired seven orbital slots which have allowed it to progress its plan to transform the company into a satellite owner and operator. With the completion and launch date for the first satellite approaching, Newsat is set for a company changing event.
2) Quickstep Holdings Limited (ASX: QHL) is best known for providing advanced composite material parts to the Joint Strike Fighter (JSF) program. Its contract wins are thanks to the patented manufacturing technologies that Quickstep has developed which allows it to build high strength, high performance parts at a competitive cost. With current contract wins that are forecast to potentially produce over $800 million in revenues, the company is set to boost revenues substantially from current levels.
3) Nearmap Ltd (ASX: NEA) provides geospatial mapping technology for clients ranging from corporates to governments through a clever combination of a busy plane taking high definition aerial photographs and software that provides easy-to-use and useful delivery of its product to clients. The company's revenue and bottom line have been growing rapidly since the implementation of a new subscription business model, with Nearmap recently reporting revenues of almost $8 million and net profit after tax of $760,000 for the half year.
Foolish takeaway
Not everyone is comfortable owning small caps, preferring the comfort of owning large, blue-chip stocks that everybody else owns. This "comfort amongst the crowd" can create wonderful opportunities for investors prepared to seek out opportunities amongst less followed and less researched smaller companies.
