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These 3 small caps have moved into the buy zone

The NASDAQ rout in the US took huge chunks out of the share prices of some pretty significant US tech stocks. Companies with little or no earnings, unproven technologies or generally priced for future growth were hit hard.

The Australian sharemarket as a whole was essentially unscathed during the plunge that knocked 8% off the tech-heavy NASDAQ index over two-and-a-half weeks. The ASX 200 was flat over the period, however the small ordinaries index (those companies outside the ASX 100, but inside the ASX 300) fell around 6%. Anecdotally, it was the same types of stocks that suffered. Companies with little or no earnings, priced for growth, or without proven technologies behind the business saw sharp share price declines.

The share prices of these three small-cap stocks have fallen sharply recently without any meaningful company-specific announcements. Now could be a good time to invest in these fast growing companies.

Mobile Embrace (ASX: MBE) is a profitable mobile payments and mobile marketing company specialising in tailored advertising solutions for agencies, brands and publishers. The share price has fallen from a high of 35 cents early in the year to 22 cents at the close on Friday, seemingly due to the US aversion to tech stocks. Profit is forecast to quadruple this year and double the year after, which should see the share price recover over time.

Yowie Group Ltd (ASX: YOW) produces and sells the Yowie chocolates made famous by Cadburys nearly 20 years ago. Yowie has an exclusive patent in the US until 2018, which will keep rival Kinder out of the market, and has ambitions to sell 500 million Yowie chocolates per year. The share price rose sharply in February from 26 cents to 92 cents, before a capital raising at 70 cents prompted a steady decline back to that level. Yowie remains very speculative but could reward investors over the long run if it can achieve success in the US.

Finally, small casino operator Donaco International Ltd (ASX: DNA) owns the profitable Lao Cai International Hotel and casino in northern Vietnam. It is currently trading on a PE ratio of around 49, even after a 17% fall in the share price, but the boutique casino will soon be expanded, which will boost earnings and revenue. It’s unlikely that Donaco’s share price will remain around $1.20 for long if all goes to plan.

Foolish takeaway

Investing in small caps can be stressful due to the violent price swings possible in thinly traded stocks. Equally, investing in small caps can also be rewarding if the company can perform as promised and deliver exceptional growth over a number of years. The companies mentioned have it all ahead of them and will reward shareholders if management can deliver on potential.

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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