I've always been an advocate of a balanced portfolio. If investors are able to maintain a healthy mix of large and small-caps, they will be one step closer to financial security. This is because the relative "safety" of blue chips compensates for the risky nature of smaller companies. With the ASX extending its stellar run of gains in the past few months, quality blue-chips are starting to look more expensive and that's why under the radar small-caps should start to gain popularity.
Here's a list of three small caps that I think have the potential to provide you with some explosive growth potential in the decades to come. However, investors must note that these companies should only make up a small chunk of your portfolio given their high-risk nature.
1. With the big four banks starting to look a bit too pricey, mortgage broker and wealth manager Yellow Brick Road Holdings Ltd (ASX: YBR) is starting to look even more attractive. What makes it a standout stock for me is its rapidly growing presence throughout Australia. Its two most recent acquisition targets, Vow Financial and Resi Mortgage Corporate, help its growth through acquisition strategy and put it one step closer to becoming a leader in the non-bank sector. While it isn't profitable just yet, it expects to be within the next two years or so.
With revenues up 27.3% in its FY14 report and its earnings before interest, taxation and depreciation improving by 12% to a loss of $5.14 million, Yellow Brick Road is coming closer to profitability.
2. BigAir Group Limited (ASX: BGL) provides fixed wireless broadband services for business and community environments. The company entered profitability in 2009 and since then, it hasn't stopped growing. Like Yellow Brick Road, BigAir has been targeting acquisition targets and has made five acquisitions since 2011 to expand its service provision and coverage. Furthermore, BigAir is starting to divert its attention towards the provision of additional internet-technology services.
It may trade on a relatively hefty price-to-earnings ratio of 24, but I think its future growth prospects fully justify its high price tag.
3. We can't talk about high-growth stocks without mentioning Liquefied Natural Gas Limited (ASX: LNG) one of the standout stocks of the year. Its share price has risen a whopping 1,754% in the past year, which goes to show how rewarding small-caps can actually be. The company is currently developing the Magnolia LNG facility in Louisiana, aiming to build a 8 million tonne per annum LNG liquefaction facility.
As risky as this may seem, management has undertaken some actions in order to reduce the chance of failure based on previous experiences. If successful, its Louisiana expansion may stretch its gains and solidify its position in the LNG sector. Investors must be aware that this is a very high-risk stock and is therefore not for the feint hearted.
