5 growing small-caps that could be big winners

One of these stocks is already a 10-bagger…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There's a fine line between speculative and early-stage investments. Personally, I draw the line at whether a company is cashflow positive and likely to stay that way, although it is also important to make sure that management are focused on returning that cashflow to shareholders.

One speculative company that has good form in that regard is eServGlobal Limited (ASX: ESV), which provides mobile payment and finance solutions. While the company has not had positive operating cashflow since 2008, it does have a history of returning cash to shareholders when it can. For example, when it sold a business in 2011, it paid out a whopping 29c to shareholders. The company is advancing its newer HomeSend product by forming a joint venture with Mastercard and telecommunications company BICS. This will result in an one-off accounting profit of over $33 million in the current financial year, but the real cashflows might still be a while away.

One of the most impressive growing microcaps on the ASX is mobile payments and digital advertising company Mobile Embrace Limited (ASX: MBE). The company has seen its shares rocket over 970% in the past year as it transitions from speculative micro-cap to growing small-cap. Some people I know have made a ten-bagger out of Mobile Embrace. At just over 20c per share, Mobile Embrace trades at around 20 times my (very) approximate estimate of FY 2014 free cashflow. Should it drop about 25%, I would be sorely tempted to buy, because although it operates in a rapidly changing and hard to predict industry, it has a strong tailwind since mobile advertising (and commerce) is becoming more important.

Redflow Limited (ASX: RFX) is exciting conscious capitalists with its battery technology that is increasingly useful in the renewable energy era for obvious reasons. Because the electricity grid is so expensive it will, in my opinion, be slowly supplemented with solar and battery storage. I would also imagine Redflow's batteries have value as a backup power source for data-centres and in remote locations (with solar). However, it's essential to realise that the company is not cashflow positive and is currently raising cash at 11c per share – it last traded at 16c.

One growing small cap that is no longer speculative is RXP Services Ltd (ASX: RXP), which provides technology consulting services. The company is a collection of smaller businesses, and is making acquisitions quite rapidly. This makes it very difficult to discern organic growth and the underlying performance of the businesses. Nonetheless, directors have made share purchases on market at above current prices, and I was heartened to see that the company provided a conference presentation to the ASX the day before it was made in April. While it does look a tad too expensive at 68c, shares recently dropped under 60c, which is a tempting price for me. The company says that, "the momentum we built up in the first half combined with a number of new client wins will see strong second-half FY 2014 results."

This contrasts with the speculative pearl producer Atlas Pearls and Perfumes Ltd (ASX: ATP), which provided to the ASX a presentation that was apparently out of date, quoting the share price before it rose over 40% in less than a week. An investor relations firm representing Atlas Pearls focussed my attention on the company by pointing out that it is well positioned to profit from an increase in pearl prices. However, I'd need a hefty discount to net tangible assets to be buying Atlas Pearls shares – I feel far more comfortable with the attitude demonstrated by RXP Services.

Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of  the companies mentioned in this article.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »