I've noticed recently that a number of fund managers and analysts have said that it's a 'stock pickers market' where individual stock selection is important. In other words, investors can't just pick the shares that have performed the best in the past few years and expect performance to continue. A perfect example of that is the big four banks.
What I have noticed is that after underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the past five years, the S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) has been making a comeback over the past six months.
That suggests that while the companies that dominate the ASX are struggling for growth, smaller companies are outperforming – and that suggests it is there where investors should be looking for companies that can beat the market.
The Small Ordinaries index represents the small cap members of the S&P/ASX 300 index but excludes those that are in the ASX 100.
If investors don't want to pick the shares themselves, they can always invest in exchange traded funds that track the performance of the index, including the iShares Small Ordinaries Index Fund (ASX: ISO) or the SPDR S&P/ASX Small Ordinaries Fund (ASX: SSO).
However, the Small Ords also includes what I would call non-investment grade companies, including a number of miners and energy companies. With their outlook dependent on commodity prices, investors may want to consider 'stock picking' and selecting from a number of quality industrial companies.
These companies include the following eleven…
| Company Name | Last price | Market Cap |
| iSentia Group Ltd (ASX: ISD) | $3.47 | $694m |
| NIB Holdings Limited (ASX: NHF) | $3.91 | $1,717m |
| Premier Investments Limited (ASX: PMV) | $14.98 | $2,347m |
| APN Outdoor Group Ltd (ASX: APO) | $6.13 | $1,021m |
| ARB Corporation Limited (ASX: ARB) | $14.63 | $1,158m |
| RCG Corporation Limited (ASX: RCG) | $1.58 | $793m |
| Virtus Health Ltd (ASX: VRT) | $6.13 | $490m |
| Bellamy's Australia Ltd (ASX: BAL) | $10.64 | $1,028m |
| IPH Ltd (ASX: IPH) | $6.95 | $1,295m |
| Retail Food Group Limited (ASX: RFG) | $5.56 | $914m |
| Altium Limited (ASX: ALU) | $5.61 | $731m |
Source: Google Finance
As you can see, these aren't what many would consider as 'small' companies, but they could all definitely grow up to be much bigger. That's one of the advantages these companies have over their larger counterparts – in many cases, they have more opportunities for growth.
While a number of the companies in the table above may appear nose-bleeding expensive on a P/E ratio basis, it's important to remember that if the companies are growing strongly, those P/E ratios can come down very quickly indeed.
Foolish takeaway
There's one other bonus for investors investing in smaller companies and that's the fact that they are generally under-researched and out of the mainstream media spotlight. That means more chance that the market will misprice the shares – an advantage for Foolish investors to make the most of.
