3 small-cap shares with huge potential

Year to date the S&P/ASX 100 (Index: ^AXTO) (ASX: XTO) has put on a gain of just 0.7%. Considering this index contains Australia’s top 100 listed companies, this is no doubt incredibly disappointing for investors.

In comparison the S&P/ASX Emerging Companies (Index: ^AXEC) (ASX: XEC) Index has climbed a stunning 29% year to date. This just goes to show that small cap shares have clearly been the place to be this year.

Whilst I don’t necessarily expect the Emerging Companies index as a whole to climb another 29%, I do believe there are small cap shares out there which could provide investors with solid returns over the next 12 months. Here are three:

ChimpChange Ltd (ASX: CCA)

This California-based digital banking business has enormous potential in my opinion. ChimpChange is aiming to disrupt the US banking industry by providing US consumers with an affordable, fun, and frictionless user experience. In July it acquired 5,700 new customers, bringing the total customer accounts on its digital banking platform to over 100,000. I’ve been impressed with the company’s innovative products. The recent launch of its mobile cheque load feature has been very successful and with several new features in the pipeline, ChimpChange looks to have a very bright future ahead of it. It’s worth noting also that this week global investment bank Moelis and Company placed a buy recommendation on its shares with a $1.20 price target.

RXP Services Ltd (ASX: RXP)

This ICT consulting services company had a fantastic FY 2016. On the top line RXP Services grew sales by 61% to $127.1 million. On the bottom line the performance was even more outstanding with a 127% increase in earnings per share to 7.6 cents. As well as getting a boost from the acquisitions of Engage Viidacom and 10Collective, I was very pleased to see the company achieve strong organic growth as well. Currently its shares are changing hands at just over 10x full year earnings, which is a huge discount to industry peers Melbourne IT Limited (ASX: MLB) and SMS Management & Technology Limited (ASX: SMX). With management expecting another strong year in FY 2017, now could be a great time to invest in my opinion.

Xenith IP Group Ltd (ASX: XIP)

This rapidly growing provider of intellectual property services is another small cap share that I feel investors should pay close attention to. Xenith IP recently grew pro forma full year earnings per share by 71% to 18.2 cents, thanks largely to the strong performance and growth in its core business activities. One key aspect I like about Xenith IP is its ability to form long-standing relationships with its 3,000+ clients. Impressively 62 of its top 100 clients have been with the firm for more than 10 years. Management believes the company is positioned well for FY 2017, making me feel confident that it will be another year of strong earnings growth. At 18x full year earnings I believe it is a better investment option than its larger industry rival IPH Ltd (ASX: IPH), which trades at 22x earnings.

If you need to make room in your portfolio for either of these shares I would highly recommend looking at selling these three wealth destroying shares right now.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor James Mickleboro 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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