Every investor dreams of finding that one stock like 1-Page Ltd (ASX: 1PG) that will explode 1,384% in 12 months and leave them grinning like the cat that got the canary.
To identify an unprofitable stock as a winner that early in its listed life involves, by definition, undertaking massive risks as the unknowns around such a business literally cannot be quantified. In order to win from investing in small-cap stocks, investors must be sure of two things:
- That the benefits outweigh the risks (e.g., worst case scenario you might lose say 50%, but if it's a winner it could quadruple in value)
- That there is a greater than 50% chance of the stock being a winner (As fund manager Peter Lynch once said, 'if you're good in this business, you're right 6 times out of 10')
Here are three speculative stocks in my portfolio right now, and my take on whether they're likely to be a winner from here:
Nearmap Limited (ASX: NEA)
Down some 23% since I added it to my portfolio, Nearmap has disappointed investors with its growth rates, which are substantially lower than forecast by management. However, Nearmap is the closest to profitability of the three stocks in this article.
This is one of the biggest hurdles for a new business to leap and Nearmap is expected to become profitable this year. Furthermore, profits should scale up rapidly as costs will remain fixed, and the business has a long-term growth trajectory as insurance, construction, utility companies and municipal bodies increasingly come to rely on its services.
The downside to Nearmap if the business remains static is significant, but the stock has potential to multiply over time and this is a favourable risk-reward ratio. Additionally with a stack of cash, the company is well funded to generate growth. I consider Nearmap to have roughly a 7/10 chance of being a winner and would buy more at today's prices.
iCar Asia Ltd (ASX: ICQ)
iCar Asia ("ICQ") is the Indonesian/Thai/Malaysian equivalent of Carsales.Com Ltd (ASX: CAR). Carsales shows how the business is done right and I own shares directly in both Carsales and iCar Asia. ICQ is up 12% since I bought it and is successfully monetising its operations as well as extending its lead over competitors and growing its network effect.
With operations in three countries, profitability could be just the beginning of a very long growth runway. On the downside the company has a small cash balance and a lot on its plate, so if it doesn't become profitable in 2017 as expected shareholders could be tapped for cash again.
The risks are greater than Nearmap, but the potential rewards are commensurately larger and I also consider iCar Asia to also have a 7/10 chance of being a winner, and would buy more shares today.
Reffind Ltd (ASX: RFN)
Speculative Reffind ("RFN") has made a name for itself already, rising nearly 400% since launch and up 80% since I bought it. I am attracted to the way RFN is moving in on conventional employee referrals (which are expensive), reducing costs and improving outcomes for employers and employees.
Additionally the company appears to have a clear focus on achieving profitability and has hit a number of significant milestones along that path already. Based on what I have seen so far (in the short time since launch) I would give Reffind a 5/10 chance of being a winner.
However, the stock has already experienced a massive upswing in its value and I expect that future announcements will only increase its rise, much like 1-Page Ltd. In light of this and unlike iCar and Nearmap, I would not consider buying more Reffind just yet.
