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4 small cap tech shares that could rise in 2016

While heavy falls in many of the top 20 shares since the start of the year are making them more attractive investments for value investors, many analysts still believe these shares will struggle to generate a decent return over the next 12 months.

Instead, there is a growing chorus of fund managers and analysts who are advising investors to look beyond the top 20 (and even top 100) shares for better growth opportunities. While it is too early to tell whether this strategy will be successful, it is prudent nevertheless for all investors to keep a watch list of small cap shares they would like to own if a buying opportunity arises.

With that in mind, here are four small cap shares that are technology focused and I believe are worthy of a spot on the watchlist of every growth investor:

1. 3P Learning Ltd (ASX: 3PL) – 3P Learning is a global online education company with cloud-based service products in numeracy, literacy and science for school students in grades K-12. Over 17,000 schools globally already use its software, but there is massive scope for further expansion especially in the North American market where there are 127,000 schools and 58 million students. 3P Learning has enjoyed a strong start to FY16 with group revenue up 20% year to date. Although it is not yet known how much of this revenue growth with translate into profit growth, the market is expecting a strong set of results based on the current valuation. For that reason, investors should keep a close eye on 3P Learning and look to take advantage of any potential weakness in the share price.

2. Appen Ltd (ASX: APX) – Appen has only been listed for 12 months, but the shares have already gained more than 200% since listing and the company now has a market capitalisation of $153 million. According to its prospectus, the company provides high quality language technology data and services in more than 140 languages and dialects to major technology companies and government agencies worldwide. This technology is applied in a number of everyday applications including smartphones, on-board control in cars, online search engines, social media and government security and intelligence. The list of potential and actual applications is wide ranging and importantly for investors, Appen is already profitable. Despite the massive increase in the share price, the shares could still potentially offer great value for investors as the company recently upgraded its full year EBITDA guidance to $11.7 million to $13 million.

3. Touchcorp Ltd (ASX: TCH) – Touchcorp is another recent listing with an exciting future ahead of it. The company has developed a software system to enable retailers to deliver non-physical items and services (like gift cards, prepaid phone credit and lottery tickets) to customers through various service points that can be directly integrated into the retailers existing system. Its first result as a public company was very positive with sales revenue increasing by 69% over the previous corresponding period. Touchcorp’s share price has spiked sharply in the last month however, and investors may therefore want to wait for a pull-back before rushing in to buy this stock.

4. Updater Inc (ASX: UPD) – Updater is a small company and the most speculative on this list. Despite this, I still believe it is worthy of a spot on investors’ watchlists as the company has an interesting business case. Updater is an online platform that aims to help people move house by using a centralised service for forwarding mail, updating accounts and records, and organising relocation logistics – a task that can be very stressful for many people. The company is based in New York and the CEO and founder David Greenberg believes an ASX listing will provide a good pathway for a possible future listing on the NASDAQ. From there he believes Updater could be a multibillion-dollar industry leader. While this may be a little hard to imagine right now considering the company is yet to make a profit, investors should keep a close eye on this story as it has the potential for extraordinary growth.

While I’m not a buyer of any of these four shares right now, there is one technology stock that has moved from my watchlist to my buy list in 2016…

5 stocks under $5

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. 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 TOUCHCORP FPO. 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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