3 small caps that should be on your watch list right now

Specialty Fashion Group (ASX:SFH), Finbar Group Limited (ASX:FRI) and Collins Foods Limited (ASX:CKF) are well placed for growth.

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These three small-cap stocks often fly under investors' radar, but if you're looking for growth, they are well worth a spot on your watch list.

1. Specialty Fashion Group

Specialty Fashion Group (ASX: SFH) is trading at its 52-week low despite posting a record gross margin of 63% and 20% top-line growth for FY14. Weak market and consumer sentiment is clearly weighing on the stock, but there are strong internal and macro factors at play that should give the company a lift.

The group has one of the largest women's customer communities in Australasia with over 7 million loyal members who contribute to 80% of sales, allowing the company to fend off competition. It started FY15 generating positive growth in same-store sales. This growth along with strategic initiatives to refresh existing brands and expand overseas should lead to more diversified and stable revenues.

On the macro front, the price of cotton has declined over 30% from its two-year high and could continue to slide as a supply glut from India coincides with a slowdown in demand from China, the world's biggest consumer. Sustained weakness in cotton prices should provide support to the company's record gross margin despite recent easing in the Australian dollar.

At a P/E of 13 the company is cheap relative to its peers, and with minimal debt on the balance sheet (net debt to equity of 18%) it can further improve on its 19% return to shareholders through organic and inorganic growth.

2. Finbar Group Limited

Finbar Group Limited (ASX: FRI) is poised to take advantage of its status as a prominent developer of medium- to high-density residential apartments and commercial property in Western Australia.

Property prices have risen nearly 40% over the past five years across the nation, with foreign investment from China widely regarded as the driver. Given that foreign investment is seen as a means to overseas migration for Chinese citizens, incoming migration to Australia is set to rise after Canada scrapped its immigrant investor program.

Although Sydney and Melbourne have long been the destination of choice for migrants, Perth has the potential to lure them away with its improving tertiary education system and more moderate increases (32%) in property prices.

The group is well positioned to meet this demand with $1.8 billion in its project pipeline, most of it centred on Perth's metropolitan area. In February the group signed a 10-year exclusivity agreement with its long-term primary building contractor Hanssen Pty Ltd, providing it with a significant cost advantage.

Finbar is off to a good start in FY15 having received development approval for the $60 million Northbridge project as well as securing a $150 million project in east Perth, and with a net debt-to-equity ratio of 8%, it has the financial capacity to execute its projects. On the valuation front, it's currently trading at a P/E of 8.6, well below its peers, in addition to a good dividend yield of nearly 7%.

3. Collins Foods Limited

Another company set to benefit from Western Australia is fast food chain operator Collins Foods Limited (ASX: CKF). The impending end to the mining boom may have stripped the state of its AAA credit rating, but housing finances is gearing up to be the next growth engine, with CommSec's State of the States October report commenting that the number of financing commitments is 8.5% above the long-term average.

The twin trends of continued economic growth and population increase from incoming migration bode well for the 38 KFC franchises that the company operates in the state. It is looking to expand its footprint and refresh current store formats, with about $25 million earmarked for store refurbishments over the next four years in Western Australia and Northern Territories alone.

The KFC brand is well supported in Australia, underpinned by strong new product promotions and innovative family dinner offerings. This is evident through its strong first-quarter FY15 performance of 21% prior corresponding period growth in NPAT.

The stock is a good pick within the fast food sector with a P/E of 15 that is below peer average and a good dividend yield of nearly 5% backed up by strong cash flow generation.

Motley Fool contributor Simon Chan does not own shares in any of the companies mentioned in this article.

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