Broker tips 7 small to medium cap shares to outperform

Broker Morgans has tipped a number of small to mid-cap companies they think represent good value.

All 7 are outside the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO), which means they are smaller companies which, have more growth potential and as I wrote yesterday, is an important consideration if investors want their portfolios to generate strong growth.

APN Outdoor Group Ltd (ASX: APO)

APN Outdoor specialises in billboard advertising – a huge growing industry – which has seen the company’s earnings soar as we outlined in February this year. Morgans says industry growth is strong and they see the potential for further earnings upgrades. APN Outdoors sports a trailing P/E of ~27x at the current price of around $7.00.

Corporate Travel Management Ltd (ASX: CTD)

Corporate Travel continues to go from strength to strength, and Morgans expects the company to report double-digit growth in earnings for many years to come and is well placed to expand offshore into consolidating global corporate travel markets. Shares aren’t cheap though, trading on a trailing P/E ratio of over 44x at $15.66.

GBST Holdings Limited (ASX: GBT)

GBST is a software company providing solutions for fund administration and financial markets systems. Morgans likes GBST because of its impressive track record of new contract wins with major global institutions – and potential for clients to upgrade to multiple applications. Again, shares aren’t cheap trading on a trailing P/E ratio of 33x at $5.05.

IPH Limited (ASX: IPH)

IPH specialises in trademarks and patents, as well as intellectual property. The law firm has a dominant market share and has earnings margins well above industry standards according to Morgans. Personally, I think IPH is a fantastic defensive company that should grow earnings through any cycle, and the recent fall in the share price is a huge opportunity.

NextDC Ltd (ASX: NXT)

NextDC operates a number of data centres in Australia’s major capital cities and is leveraged to the massive increases in data and technology use, the internet of things and the move to cloud software platforms. Morgans expects the company to announce secondary data centres in Brisbane and Melbourne shortly and thinks the company will be included in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in June 2016.

RCG Corporation Ltd (ASX: RCG)

The owner of The Athletes Foot is forecast to grow earnings per share by 45% in the 2016 financial year (FY16) and ~20% in FY17 and FY18 by Morgans. But RCG still appears to be flying under the radar, trading on an FY17 P/E of 18x according to the broker.

Vitaco Holdings Ltd (ASX: VIT)

The vitamins and sports supplements company with brands such as NutraLife, Musashi and BodyTrim is expected to grow ahead of the sector, thanks to favourable industry dynamics (demand from China), and a diversified portfolio of well-known brands. Morgans thinks Vitaco is capable of stronger earnings growth than the market is pricing in.

Foolish takeaway

I’m always sceptical of broker recommendations given their inherent conflicts of interest, but the companies above are a solid group of outstanding companies that could generate above-market growth for your portfolio.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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