The small cap end of the share market is often seen as too dangerous or risky. However, I think small caps offer the most potential because they have the most room to grow.
If I were to invest $3,000 in three small caps today, these are the ones I'd choose:
Select Harvests Limited (ASX: SHV) is one of the largest almond producers in Australia. It has seen its earnings and share price trashed over the last two years, but I think this presents an opportunity.
The global demand for almonds is steadily growing. The price of almonds can vary significantly year to year. It's best to buy cyclical businesses at the bottom of the cycle, such as now.
Select Harvests management expect to increase the total output of almonds by over 50% by the mid-2020s.
BWX Limited (ASX: BWX) probably won't be considered a small cap for long. It's the owner of the natural beauty brand Sukin, which is increasingly popular in Australia and overseas.
The business is experiencing strong growth in many markets and I wouldn't be surprised if BWX keeps beating the market if it can continue growing profit at a rate of high double digits.
The changing consumer habits towards healthier products should benefit BWX substantially over the next few years.
WAM Microcap Limited (ASX: WMI) is the newest listed investment company (LJC) launched by Wilson Asset Management.
If you're unsure which small caps you want to buy and you're happy to let someone else pick for you, then this LIC could be right up your alley if it keeps beating the market and could pay a big dividend in the future.
Foolish takeaway
Small caps can be a great way to beat the market. I think all three of the above options should be market-beaters over the next few years at the current prices.
If I had to choose one I'd choose BWX because of its global growth potential.