Businesses listed on the ASX with small market captialisations, or small caps, are something of a mystery for many investors. The simple reason for this is that because more investors own the larger stocks, they attract more media attention, and the media exists to sell newspapers or generate "clicks" online.
For that reason, it wouldn't make sense for journalists to write in-depth stories about the stocks at the smaller end of the market that are only held by a few thousand investors, rather than those about large caps that are held by a few million. The premise is that if you have a vested interest in a stock through ownership of it, you are more likely read a story about it, which is something you've probably experienced for yourself right here on The Fool.
But that leaves a whole host of promising and growing businesses off the radar of most retail investors, which is a huge opportunity missed when you consider some of the highly successful businesses that you can buy a piece of on the ASX.
Here are just three to consider that have strong competitive positions and also benefit from stable recurring revenue, which puts them in a great position for the future.
Altium Limited (ASX: ALU) is a technology stock that manufactures printed circuit boards for electronic devices.
Customers of Altium's products use the printed circuit boards created by the company as "connectors" in medical devices, computing systems and even passenger vehicles.
One of the most appealing elements to the business is that customers are willing to pay an annual licence fee on top of the initial purchase price in exchange for ongoing support and updates, which speaks volumes for the value they place on the product. The company has somewhere north of 25,000 paying subscribers, which is a fantastic base on which to grow the business.
Infomedia Limited (ASX: IFM) is a company that has attracted more media attention than most other small caps lately, and generally for the wrong reasons. There has been a high profile battle between the founders of the business and the current board for control of the company.
However, as of this week those matters are settled, and promisingly, the existing board held their positions, which means that there is likely to be minimal disruption to normal operations from this point.
Infomedia supplies an electronic parts catalogue system to car manufacturers and service centres across the world. This might sound too simple to be a good business, but each make and model of a particular car has hundreds of parts needed for repair and maintenance.
When you multiply that number by millions of cars across thousands of car dealers across a country as vast as Australia or the United States, you begin to get an idea of the complexity of having an inventory management system that works effectively for that type of business.
Infomedia supplies global car companies with the back end infrastructure to upload and manage incredibly diverse electronic parts catalogues. The benefit is that the business is scalable, and customers tend to be long term and stable, which results in recurring revenues.
As a mortgage broker, Mortgage Choice Limited (ASX: MOC) is probably the most simple to understand stock on this list. The business is independent of the banks and building societies and operates a franchise model.
It earns money when a customer signs up for a home loan through a Mortgage Choice franchisee in two ways. The first is through an up front percentage commission on the face value of the loan, while the second revenue stream is through trailing commissions that are earned over the life of the loan as the borrower pays down the mortgage.
Those trailing commissions are the reason that Mortgage Choice can continue to earn strong profits irrespective of the housing market. The business has never cut its dividend, even during the global financial crisis when home lending took a huge hit. The market has overlooked this fact and sold down the stock heavily, which sees it returning a fully franked dividend of over 9%.
The small cap conclusion
For those seeking yield, Mortage Choice is a compelling proposition at current levels, while Infomedia and Altium offer better potential for capital growth, with Infomedia slightly ahead on upside potential as the board ructions recede into the past.
