Small cap stocks are often a good place to find hidden gems that professional and institutional investors have not yet discovered or are unable to invest in given limitations in their investment criteria.
In his book, “One Up On Wall Street: How to Use What You Already Know to Make Money in the Market”, the famous investor Peter Lynch encourages active investors to look at small cap stocks for this very reason.
With that in mind, here are three small cap stocks that could help you beat the professionals:
- Capilano Honey Ltd (ASX: CZZ) packs honey products for sale in the domestic and export markets. It has a return on equity of 16%, a PE ratio of 15, and very little debt with a net debt to equity ratio of 12.5%. The company also has a dividend yield of 2.4% and a payout ratio of 37% which makes its dividend sustainable and allows management to retain profits for growth.
- Collection House Limited (ASX:CLH) provides debt collection and receivables management services in addition to other credit and insolvency related services. Its currently trading at a PE ratio of 9 and has a return on equity of 10%. With the high levels of Australian household debt, the industry has attracted a number of competitors and successful firms will need to ensure that they do not overpay for the acquisition of new debtors’ ledgers.
Greencross Limited (ASX: GXL) is a pet care retailer and provides veterinary services. The pet care industry is proving to be more defensive and less cyclical. Greencross is also well placed to grow through acquisitions of smaller operators as it consolidates the fragmented veterinary services, pet food, and pet accessories market. It’s trading cheaply with a price/earnings ratio of 14.
If you are looking for more ideas on companies to invest in, you might want to have a look at these three Aussie companies that are taking over the world.
5 stocks under $5
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*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.
You can follow Kevin on Twitter @KevinGandiya.
The Motley Fool Australia owns shares of Capilano Honey Limited and Greencross Limited. 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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