Local investors hold a disproportionate amount of their wealth in a select few companies. This is particularly the case with the major banks and miners as well as Telstra Corporation Ltd (ASX: TLS) which together account for more than 40% of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
As important as it is to hold some larger, more established companies in your portfolio, gaining exposure to some of the market’s smaller stocks can also be necessary to build your wealth over the long run.
Here are just a few of the advantages of investing in small-cap stocks:
- The bigger they get, the harder it is to grow. Smaller companies have the capacity to grow significantly quicker than the larger players
- Small-caps are not followed as closely by the media, helping them remain under the radar
- They’re also not followed by the big-name investors and institutions
With strong headwinds facing the banks and miners, now could certainly be the time to consider getting exposure to the smaller end of the market. Here are five companies I believe offer compelling value today:
- Nearmap Ltd (ASX: NEA) provides ultra-high quality aerial photographs for its business and government customers. While the company has already established itself in Australia, it is now expanding into the much larger US market which could see revenues and earnings grow strongly in the years to come. The shares have been sold down heavily recently and are currently trading at just 39.5 cents, giving investors an opportunity to stock up for the long haul.
- Senetas Corporation Limited (ASX: SEN) is another company that appears to have lost favour with the market recently, although I think it’s an attractive company worth considering today. Senetas provides high-speed data encryption hardware which is designed to protect data while it is travelling between sites, rather than while it is at rest. The company was awarded NATO Certification last year, giving it a competitive advantage over would-be rivals.
- Somnomed Limited (ASX: SOM) operates in the healthcare industry, developing and manufacturing products for the treatment of sleep apnea. While its products mightn’t be considered as effective as those offered by rivals ResMed Inc. (CHESS) (ASX: RMD) or Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), they are considerably cheaper and less invasive for the end user, which could go a long way in determining which product medical practitioners ultimately recommend.
- Catapult Group International Ltd (ASX: CAT) is another tech company worth a closer look. Catapult Group is a global sports analytics business, providing athletes and sporting clubs with detailed, real-time data to monitor and measure the performance of those athletes. As teams around the world become increasingly scientific in their approach to game day, I believe this could become a very significant market. Of course, there is always the risk that bigger players such as Nike or Adidas could make a play, but Catapult is certainly off to a promising start.
- Hansen Technologies Limited (ASX: HSN) provides proprietary customer care and billing solutions for various service providers (e.g. energy and telecommunications companies). Billing is a vital component to most businesses offering services while it is also costly for them to switch providers, leaving Hansen somewhat protected from a downturn in the economy and from rivals. The shares are trading at a new 52-week high of $3.19 today, but could still make for a solid investment over the coming years.
Investors need to remember that investing in smaller companies does come with additional risks, but they can also be far more rewarding in the long run when things go to plan.
While each of the five companies mentioned above could make for reasonable buys today, I would be most inclined to add to my holdings in Hansen and Nearmap, while Somnomed is another company I’d be interested in building a position in.
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Motley Fool contributor Ryan Newman owns shares of Hansen Technologies, Nearmap Ltd., and Senetas. Ltd.. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.
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.