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3 explosive small-caps that could be a bargain at today’s prices

With a number of big movers in the market after results season recently – including some baby formula shares that are shooting the lights out – it’s possible investors have been forgetting about the smaller stocks, which are starting to look cheap.

Although each of the following three companies face headwinds, arguably this is priced into the stock already and continued growth could lead to big returns for shareholders of:

Lifehealthcare Group Ltd (ASX: LHC) – last traded at $1.47, down 50% for the year

Lifehealthcare Group shares were pummelled after a sub-standard profit report recently, as well as investor fears that a potential review into prosthetics pricing could hurt the group’s profits and margins. As I wrote in this article, Lifehealthcare management stated that their business is probably not at risk from a pricing review. Management also hinted at a stronger second half after lifting their working capital requirements. There is a risk that Lifehealthcare continues to underperform in the second half, but the group operates in a vital industry and a significant amount of underperformance is already priced in to the company.

I am looking to buy more shares when Foolish trading rules and funds permit.

Yowie Group Ltd (ASX: YOW) – last traded at $0.70, up 22% for the year

Although up 22% for the year, Yowie shares have declined 40% in the past six months on a variety of market worries, including a change of manufacturer. The business recently reported positive operating cash flow, which is the first step towards achieving overall profitability and sustainable ongoing operations. However, this is likely to reverse in coming months as production ramps up at the Madelaine Chocolate facility. I expect several months of mediocrity from Yowie as the company transitions, but new accounts and management incentives should drive sales higher over the next twelve months. A key consideration is making sure that the number of shares on issue stay under control and that management doesn’t become too short-term focussed.

I recently topped up Yowie at $0.78, and am not buying more unless it heads under $0.70.

Yellow Brick Road Holdings Ltd (ASX: YBR) – last traded at $0.29, down 52% for the year

Yellow Brick Road (“YBR”) disappointed investors recently when it announced that it was focussed on prioritising growth over achieving positive cash flow, even though this should lead to a more substantial company in the medium term. YBR is focussed on taking market share in mortgages, financial advice, and wealth management. It has a small share of the market that could make for a profitable investment. I believe YBR is making good progress on this front with its expanding branch network as well as a stable of high-quality products. One downside is the risk of a housing/lending collapse, but without the ability to predict one that’s an ‘if-and-when’ scenario.

I recently topped up Yellow Brick Road at $0.19, and have no interest in buying more shares unless they head back to that level.

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Motley Fool contributor Sean O'Neill owns shares of LifeHealthcare Group Limited, Yellow Brick Road Holdings Limited, and Yowie Group Ltd.. 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 has no position in any of the stocks mentioned. 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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