In the past year, the S&P/ASX Small Ordinaries Index (ASX: XSO) (^AXSO) has underperformed its larger counterpart, the S&P/ASX 200 (ASX: XJO) (^AXJO) by more than 6.5%. Still, that hasn't stopped some of the best small and micro-cap stocks on the market from notching up more than 200% in capital gains.
But the good thing is, I believe a number stocks have much further to run.
The first stock is a small and diversified biotechnology company named ADMEDUS FPO (ASX: AHZ). At $0.125 per share, it has grown by more than 330% in the past year alone, but recently traded as high as $0.19. I've put the retraction in its share price down to the market's impatience. It is currently forecast to realise its first (minor) profit in FY15.
However with its CardioCel technology, which is now available for sale in the United States, revenues and earnings can be expected to grow well into the future and opportunities for the technology seem endless. Currently Baillieu Holst Research and Morgans have price targets of $0.25 and $0.23 on the company respectively. For once, I agree with them.
The second company which is up a whopping 213% in the past 12 months is Donaco International Ltd (ASX: DNA). Donaco currently owns a 34-room hotel with eight gaming tables in Lao Cai Vietnam. After the recent tech selloff, Donaco's share price fell (unjustifiably) by more than 15%. The company recently announced its new 428-room 5-star hotel and resort facilities are due for a soft opening on 18 May 2014. This will drive much higher earnings and revenues in coming years.
However in its most recent quarter, in the aftermath of the terrorist attacks in China and missing Malaysian Airlines flight, visitor numbers dropped slightly. This has put further downwards pressure on its share price, creating a buying opportunity for savvy investors. This company has performed well for me, but if it drops any further, I'll consider buying more.
Lastly, Liquefied Natural Gas Limited (ASX: LNG) ("LNGL") has been a standout performer in 2014. It has already climbed a whopping 139% in just a few short months. And rightly so. The company has made progress preparing its 8 million tonnes per annum LNG liquefaction export facility (named Magnolia) in Lake Charles, Louisiana USA, for financial close in mid-2015.
Although the current gains are great, it's not a guaranteed 10-bagger (1,000% gain) just yet. In fact, it's probably more risky now than it was six-months ago. That's because LNGL is currently preparing for construction of the Magnolia project which is estimated to cost $2.2 billion. So it's not yet making any money. To achieve its goal it has to secure a bankable construction contract, complete binding tolling agreements, receive debt funding and get FERC and DOE approval. However, if the stars align and management are able to get the project to construction, I believe the stock will never again trade below $2.00 per share, even with only 4 million tonnes per annum capacity.
Foolish takeaway
Each of these companies are high risk. LNG is very high risk and should be treated as such. When looking at these types of companies (i.e. ones which seem to live off potential rather than actual earnings) you have to be prepared to lose money. That way, if you don't, you'll be a happy investor but, if you do, you would have already accepted it. However, in saying that, I hold each of these companies in my own portfolio (thanks to the gains they make up a sizeable portion of it!) and would be more comfortable buying and holding these three than either the Commonwealth Bank of Australia (ASX: CBA) or National Australia Bank Ltd. (ASX: NAB).
