3 small-cap shares I’d buy with $5,000

The performance of the S&P/ASX SMALL ORDINARIES (Index: ^AXSO) (ASX: XSO) over the past 12 months has been quite extraordinary, especially when you consider its outperformance against the larger market indices.

The chart below highlights this point, and although some commentators have suggested that now could be a good time to rotate back into the top 20 shares, I think the small end of town still presents the best opportunities for investors looking to achieve market beating returns.

Source: Google Finance

Source: Google Finance


With that in mind, here are three small-cap shares that appear worthy of a $5,000 investment:

Paragon Care Ltd. (ASX: PGC)

The medical supplies company delivered an impressive full year result thanks to the contribution from a string of earnings accretive acquisitions and robust organic growth. As highlighted in the charts below, Paragon Care has been on the right track when it comes to its operating performance over the past four years and this has seen a rapid increase in dividends paid to shareholders.

Source: Company Presentation

Source: Company Presentation

Investors can expect the strong earnings momentum to continue over the next 12 months as the latest result only included a nine month contribution from the latest acquisitions. The shares currently trade on an attractive valuation, with a trailing price-to-earnings ratio of less than 15.

Capilano Honey Ltd (ASX: CZZ)

Shares of the honey producer have now fallen by more than 22% from their 52-week highs, despite the company recently reporting another strong full year result that showed profit growth of more than 20%. Sales to export markets, including China, have been particularly strong over recent years, although some investors may be concerned that changes to Chinese import regulations could impact future sales into the region. Nevertheless, I think the current valuation offers an appealing risk-reward proposition for investors looking to gain exposure to a company with a number of attractive features. Investors should keep in mind, however, that Capilano faces the same environmental risks as any other agricultural company and this warrants an additional margin of safety.

Contango Microcap Ltd (ASX: CTN)

Investors looking to gain instant exposure to a diversified portfolio of small cap shares might want to consider buying shares of Contango Microcap. It is Australia’s long running micro cap listed investment company (LIC) and, since its inception in 2004, has delivered an average annual investment return of 15.7%. Importantly for investors, the shares currently trade at a slight discount to their latest net tangible asset value and this is an important consideration when it comes to investing in a LIC. Some of the biggest holdings of the investment portfolio include fast growing companies such as Catapult Group International Ltd (ASX: CAT), Pro Medicus Limited (ASX: PME) and Webjet Limited (ASX: WEB).

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Motley Fool contributor Christopher Georges owns shares of Capilano Honey Limited and Paragon Care Limited. 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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