Investors are always looking for the latest hot small-caps that are destined to pop and return 3 million percent in three weeks. Unfortunately, correctly selecting these stocks is a low percentage game and investors have a far better chance of success if they can correctly select a small company with growing earnings – even if it’s not very exciting.
The company’s small size alone will usually mean that any meaningful success will lead to rapid growth in its share price. Here are five small companies I actually bought with $5,000:
Lifehealthcare Group Ltd (ASX: LHC) is a junior medical device seller that has been on a rollercoaster ride in the past two years after a successful acquisition followed by a sub-par annual report. The company uses skilled salespeople to sell medical devices from manufacturers to surgeons and captures a percentage of the margins for itself. Vulnerable to a weaker Australian dollar, my $500 investment hasn’t played out as expected, but I also think the business was likely oversold by the market.
Nearmap Ltd (ASX: NEA) is an aerial imaging company with a profitable Australian business and a slowly expanding US footprint. New technology will allow the company to capture greater swathes of the US at a lower cost, and Nearmap can now offer 3-d images to customers. Nearmap has a good cash balance, although spending in the US has been heavy and investors will want to watch this bears fruit. I accidentally placed two identical orders in the market when I topped Nearmap up a while ago, and it takes up a little more of my portfolio than it should at over $2,000.
Yellow Brick Road Holdings Ltd (ASX: YBR) is a minuscule home loan financier and wealth manager with an estimated 4% of the market. Its opportunity comes from taking market share away from the major players – and there’s plenty to go around. Growing via acquisition as well as targeted advertising and the lowest lending rates around, Yellow Brick Road nevertheless has to spend heavily up front in order to capture mortgage revenues (which pay back over many years). Shares have been sold down heavily thanks to investor fears about the Australian mortgage market, but I believe the market’s concern is overdone. I’ve bought in twice now, for a total of $1,000.
Admedus Ltd (ASX: AHZ) sells a variety of products used in heart repair operations. Although I was initially optimistic about the success of its treatment and its growing sales, the company has failed to turn heavy spending into corresponding sales success. A recent contract win has management confident they can become profitable in financial year 2018, yet I believe investors should remain cautious. I continue to hold, but my $500 of shares is now worth $230.
Last but not least, A2 Milk Company Ltd (Australia) (ASX: A2M) caught my eye when I realised the bulk of its sales success to date had come from its Australian operations – and it was just launching in the US, UK, and China. If the company’s milk really catches on with consumers and leads to improved digestion, I suspect there’ll be more success to come – plus its baby formula is booming in China. So far, A2 can charge a premium for its products and if it really leads to scientifically-validated proof of better digestion, I expect the company could have an edge over the competition.
As you might realise from my article, I'm down on three of these investments. While some will pay off and some might have to be cut, I would have been better served putting the money in The Motley Fool's three 'new breed' blue chips.
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Motley Fool contributor Sean O'Neill owns shares of A2 Milk, Admedus Ltd., LifeHealthcare Group Limited, Nearmap Ltd., and Yellow Brick Road Holdings Limited. The Motley Fool Australia owns shares of A2 Milk. 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.