While there are lots of definitions of what is or isn't a small cap, here we've used a market capitalisation of less than $500 million as the determinant. There are a number of reasons investors should consider holding smaller companies in their portfolio –
- Smaller companies are often easier to understand and value than larger, more complex businesses.
- Smaller companies often occupy profitable niches which can be a form of sustainable competitive advantage.
- Small caps are more likely to be under-researched by investors which can lead to more opportunities to discover undervalued stocks.
- Small caps generally have faster and higher growth potential.
The following four companies meet all of the above points and investors may want to uncover their secrets.
1) Blackmores Limited (ASX: BKL): $459 million – While Blackmores may be a consumer brand familiar to many, the fact that the company is listed and its share price has increased 200% over the past decade is probably unfamiliar to many. The strength and trustworthiness of the Blackmores' brand creates a powerful competitive advantage for the vitamin and supplement producer.
2) Freedom Foods Group Ltd (ASX: FNP): Market Cap $428 million – Freedom Foods greatest advantage is arguably its world-class allergen free food manufacturing facility. With more and more people being diagnosed with food allergies, Freedom has positioned itself to be the supplier of choice to this growing market.
3) Infomedia Limited (ASX: IFM): Market Cap $227 million – As a leader in the supply of car part catalogues in electronic form to the automotive industry, Infomedia is operating in a true niche. The innovative and value add services the company provides makes this a great little growth story.
4) Vita Group Limited (ASX: VTG): Market Cap $101 million – A relative unknown company with telecommunication retail brands that are well known. Vita's shop fronts include Telstra, Apple Next Byte and Fone Zone branded stores. Vita has positioned itself to benefit from the continued growing demand by consumers for mobile technologies.