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2 small cap share ideas for your watch list

While most investors will choose large, defensive blue chip stocks such as Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) as the building blocks for their portfolio there can still be room for some smaller stocks with higher growth potential to add some zing.

If you’re looking for some small cap investment opportunities to research, here are two that you might want to consider taking a closer look at.

Collins Foods Ltd (ASX: CKF) operates a large number of KFC restaurants along with Sizzler restaurants and Snag Stand outlets.

Collins Foods continues to expand via the acquisitions of other KFC franchises, most recently this included the purchase of 13 KFC restaurants throughout NSW and Victoria.

With a financial year operating with a year ending on 1 May, investors recently had the opportunity to review the group’s full year results. Amongst the highlights were a reduction in net debt from $122.8 million to $112.5 million and an improvement in return on capital employed of 2% to 14.9%.

Collins Foods achieved growth of 22.3% in underlying earnings per share to 32.3 cents per share (cps) and increased its dividend by 21.7% to 14 cps. Based on these results the stock is currently trading on a price-to-earnings (PE) ratio of 13.7 times with a dividend yield of 3.2%.

Lifestyle Communities Limited (ASX: LIC) develops, owns and operates affordable living residential land lease communities.

The group currently has 13 communities either in planning, development or under management.

Given Australia’s aging population and the unaffordability of housing and services for many Australians, Lifestyle Communities provides a valuable offering and operates within an attractive niche.

With the company scheduled to release its full year results on August 18, investors don’t have long to wait until they can pour over the results in detail, however, profit guidance of approximately $16.7 million (in line with last year’s profit result) was recently provided.

Based on this guidance the stock is trading on a PE ratio of 20.6 times which would appear quite reasonable if the analyst consensus forecast for 2017 earnings growth of approximately 25% is achieved. (Source: Reuters)

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. 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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