Forget boring blue-chip stocks like Woolworths Limited (ASX: WOW) and Suncorp Group (ASX: SUN), small-cap stocks are much more exciting. However they're definitely not for the fainthearted.
Up 10% one day, down 10% the next. It's easy to see why.
However, if you play your cards right they can be very rewarding.
For example, in March I told Foolish (capital 'F') investors to buy Liquefied Natural Gas Limited (ASX: LNG). It's a small cap resources stock with its flagship Magnolia liquefaction project in Lake Charles, Louisiana, USA. Although it's an unprofitable small-cap stock, the Magnolia project is an extremely promising concept and investors have decided it's worth the risk. And risky it is. With today's 17% jump to $0.965, it's up around 213% since I recommended it less than three months ago.
Whilst I continue to believe it holds tremendous long-term value (if the project successfully meets the necessary milestones), investors should carefully consider the risk/reward relationship of this unique company and treat it for what it is: a speculative buy.
In April, I highlighted Donaco International Ltd (ASX: DNA) as a great long-term buy. Since then, it's down around 25%. The reason for its fall can be attributed to pre-emptive speculation from those concerned by the tensions between Vietnam and China. It couldn't have come at a more inconvenient time for the casino's management who have just opened their flagship 5-star resort and casino complex in Lao Cai, Vietnam.
However today (like they did last week) management informed the market that there has been no adverse effect on operations or visitation rates in recent months and in fact "visitor numbers are up strongly for May 2014 so far." As a result shares jumped over 15% in afternoon trade.
In October last year, Admedus FPO (ASX: AHZ) – formally Allied Healthcare Group – was my top stock pick. At the time it traded at $0.089 but rallied as high as $0.18 within two months. However, since then, the market has apparently forgotten why it rallied in the first place. With shares up 4% today it currently trades for as a little as $0.10, representing a meager gain of just 12.3% for the past seven months.
With the group's ground-breaking CardioCel regenerative technology beyond trials and now available for sale in both Europe and the US, revenues and earnings can be expected to grow significantly in coming years. The recent retraction in share price to just $0.10c could be put down to management's decision to conduct a placement of shares to institutional, sophisticated and retail investors at that price.
Are they still a buy?
For investors wanting to fulfil their high-risk/high-reward desire and take a chance at winning big on the stock market, each of these companies could be what you're looking for. LNG Limited is by far most risky but potentially most rewarding, and whilst the concerns over the Vietnam/China tensions may have resulted in an unnecessary sell-off of Donaco's shares, country risk is very real threat to shareholders and outside management's control. However I remain confident in each company and continue to hold my shares.
