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The top 10 small cap stocks on my watchlist

The S&P/ASX 20 (Index: ^AXTL) (ASX: XTL) index, which holds Australia’s top 20 companies, has plunged more than 12% in the past six months as the share prices of banks and large miners plummet.

Crashing commodities prices have driven the big miners’ earnings down while the big four banks have been forced to raise large sums of capital at discounted prices. Between them, they account for more than a third of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Headwinds continue to blow for both the banks and miners and despite their relatively cheap prices (miners) and strong dividend yields (banks), share prices could head even lower from here.

For investors looking to beat the market, now is the time to consider taking a look at the smaller end of the market. I don’t mean speculative mineral and energy explorers, or risky biotech stocks, but solid industrial companies that could see their share prices soar.

Here’s my pick of 10 small-cap companies that could boost your portfolio…

Company Market cap share price Industry
Vita Group Limited (ASX: VTG)             $247.9m $1.64 Consumer Discretionary
Speedcast International Ltd (ASX: SDA)             $573.6m $4.75 Telecommunication Services
Vita Life Sciences Limited (ASX: VSC)               $52.7m $0.92 Healthcare
Somnomed Limited (ASX: SOM)             $129.2m $2.53 Healthcare
Nanosonics Ltd (ASX: NAN)             $405.4m $1.43 Healthcare
Netcomm Wireless Ltd (ASX: NTC)             $219.4m $1.70 Information Technology
Hansen Technologies Limited (ASX: HSN)             $520.9m $2.94 Information Technology
GBST Holdings Limited (ASX: GBT)             $280.2m $4.21 Information Technology
Capitol Health Ltd (ASX: CAJ)             $290.0m $0.56 Healthcare
Nearmap Ltd (ASX: NEA)             $119.1m $0.34 Information Technology

Source: CapitalIQ

You’ll probably note that many stocks are in the information technology and healthcare space. That’s no coincidence given the strong tailwinds in both sectors. The massive take up of technology and an ageing population are likely to continue to be strong forces driving growth in both sectors for many years ahead.

While Vita Group is in the consumer discretionary (retailing) space, it too is linked to the technology sector.

Speedcast is a company I’ve mentioned more than a few times, including here and here. It provides telecommunications services via satellite to remove and maritime locations (oil rigs, remote mines etc). With ongoing consolidation in that sector, it’s also possible that Speedcast is on the list of potential takeover targets.

Foolish takeaway

Over the past twelve months, the above 10 companies have seen an average return of 44% – well above the market return – but that might be just the start. If you’re looking to diversify your portfolio away from the Top 20, the list above is a perfect place to start.

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Motley Fool contributor Mike King owns shares of Capitol Health Ltd. and Nearmap Ltd.You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Hansen Technologies. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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