MENU

Probably, my top 2 small cap share ideas right now

Pro Medicus Limited (ASX: PME) shares and Gentrack Group Ltd (ASX: GTK) shares are amongst my top small cap picks on the ASX.

Why buy small cap shares?

Most investors make money in shares when share prices rally or dividends are paid.

Good investors believe dividends should only be paid when the company cannot do anything worthwhile with its money. The biggest dividends usually come from ‘ex-growth’ blue chip companies like Telstra Corporation Ltd (ASX: TLS).  

Indeed, if a company is growing and can invest its cash for a return of 15% each year, why would you want them to pay a dividend to investors? In the bank, that cash would earn 3%. Of course, it’s best when you get dividends and share price growth.

Small-cap companies are often perceived to be ‘growth’ companies with long-term potential. The best kinds of small-cap companies, which I define as being worth around $500 million or less, are those that have a niche product or service. They should generate high returns on invested capital (ROIC) and have little debt.

But the best thing about small cap shares is the fact that fewer professional analysts research them. And if fewer analysts follow them it means that the big investment funds have not yet bought in.

Pro Medicus

Pro Medicus fits the bill of a great small cap company, except that its share price has rallied so fast that the Melbourne-based company is now worth more than $530 million. Pro Medicus owns a software that enables doctors to inspect medical images from their phones.

These images are often enormous files, so the fact that Pro Medicus’ systems can securely send and receive them in less than a handful of seconds makes it an easy sell to customers, who include some of the biggest hospitals around the world.

Gentrack

Gentrack also creates software. Clients of the $400 million business include airport operators, as well as energy and water utilities. The company recently boosted its UK exposure with the acquisition of Junifer Systems, a water utility software specialist.

While I’m disappointed I missed the rise of Gentrack shares, it is a good business with growth potential. It also pays a handy dividend.

Foolish Takeaway

There are risks to investing in any business, and these small cap companies are no exception. However, if you are buying quality small companies, these are no riskier than any other company on the market, even those in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Motley Fool's #1 Dividend Pick for 2017

With its shares up 99% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Telstra 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.