The Australian stock market has been firing on all cylinders over the last few years. In fact, since the beginning of 2012, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has piled on roughly 35%, absolutely smashing the returns that would have been recognised from investing in a term deposit or government bonds.
The nation’s blue-chip and growth stocks have led the charge, while investors in the smaller end of town have watched in awe. In the same time that the country’s 200 largest stocks (measured by market capitalisation) have rallied to fresh highs, the S&P/ASX Small Ords (Index: ^AXSO) (ASX: XSO) has actually retreated nearly 4%! The performance of the two indexes are compared below:
The ASX 200 has been a much better performer for a number of reasons. First, interest rates are sitting at a record low so investors have sought out the highest yielding stocks, such as the big four banks, Telstra Corporation Ltd (ASX: TLS), Woolworths Limited (ASX: WOW) or Wesfarmers Ltd (ASX: WES). Second, the larger companies are more defensive in nature – with many investors remaining cautious of the outlook for the global economy, most would prefer to play it that little bit safer. Third, it could also be argued that investors seem to be going where the rest of the market is, and avoiding the sections that haven’t performed so well based on the assumption that will only continue.
The truth is, that will not be the case. Although it is impossible to tell when it will rise, the small-cap section will not fall forever. In fact, it will be just the opposite.
Interest rates will inevitably rise (possibly sooner rather than later), which will lessen the appeal of many of the already over-valued large caps. What’s more, investors will soon realise the incredible opportunities waiting to be found at the smaller end of town. Let’s just say the gains could be quite unbelievable when that does happen.
With that in mind, here are five companies you should seriously consider adding to your portfolio today, before the market sees what it’s missing out on:
1. Select Harvests Limited (ASX: SHV) is an almond producer, set to continue benefiting from the drought in California, the world’s largest producing region. Given that its orchids are at a prime stage of growth, Select Harvests’ profits should continue to climb and so should its shares.
2. Yellow Brick Road Holdings Ltd (ASX: YBR) is a mortgage broker in its early days of growth. The low interest rate environment should see demand for the company’s services continue to soar in the coming years.
3. Nearmap Limited (ASX: NEA) is a provider of ultra-high resolution aerial photographs of towns and cities across Australia, designed to save customers both time and costs across various industries. Its mapping services are arguably even better than those provided by Google Inc (NASDAQ: GOOGL). Foreign expansion is just one possibility for the company which could see shares scale new highs.
4. Greencross Limited (ASX: GXL) is a veterinary services provider which is also rapidly expanding throughout Australia as it acquires more and more practices. For the six months ending 31 December 2013, the company grew revenues and profit by an astonishing 24% and 159%, respectively.
5. Collection House Limited (ASX: CLH) should also benefit when interest rates eventually rise. As a debt collection agency, demand for its services should climb as bad debts increase. It recently reaffirmed its NPAT guidance for FY14 at between $17.5 million and $18.5 million.
Foolish Bottom Line
The small-cap section of the market has some incredible opportunities and, although they offer less security than the larger companies, could also reap far greater rewards.