Investing in small-cap shares can bring big returns for investors prepared to take on more risk as they often receive less coverage from the analyst community and have the potential to grow profits relatively quickly as they are coming off small bases.
Small cap shares will also come on all sorts of valuations that reflect how highly investors value their growth potential. Some will trade on cheap multiples of profits, while others will trade on huge multiples thanks to their growth potential.
The key to generating strong investment returns is identifying good companies on reasonable valuations. Below I have three to consider.
Lifehealthcare Group Ltd (ASX: LHC) is a medical device distributor that has a decent track record of revenue and profit growth. Last week it also announced it has extended a key distribution agreement with U.S. partner K2M Group and is forecasting mid-to-high single digit revenue growth alongside mid-to-low digit EBITDA growth for the full year.
The company does carry some debt, but the stock looks cheap selling for $2.15 on around 10.5x reasonable estimates for full year earnings per share of 20 cents. The stock also offers a trailing 6.4% dividend yield that is likely to lift in the year ahead if the company performs to its forecasts. You can't ask for much more than that as small-cap investor prepared to take on a little more risk in pursuit of potentially big returns.
Medical Developments International Ltd (ASX: MVP) is a fast-growing business that sells the "Green Whistle" emergency pain relief medical device used by medical professionals and accident and emergency teams. Sales have been on a tear worldwide with much anticipation that the group may make a success of a move into the U.S. retail market for its respiratory devices.
Today the stock sells for $5.03 with some of the heat coming out of its valuation over the past year. It is debt free, profitable, and fast growing with potential to deliver strong returns to investors in the years ahead.
Pro Medicus Limited (ASX: PME) has been one of the best performing small-cap shares on the ASX over the past few years thanks to the strong sales of its Visage 7 medical imaging system. Its market-leading technology is what supports its large valuation and growth prospects as it continues to sign major new deals with U.S. healthcare providers in particular.
This business is also debt free, profitable and fast growing, although its high valuation means it is high risk as there's plenty of expected success priced into its valuation.
I wouldn't be surprised if all three of these companies deliver strong returns to investors over the years ahead. Lifehealthcare is undoubtedly on the cheapest looking valuation, although any significant drops in the Pro Medicus or MVP share prices would also have me as an interested buyer.
