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These are my 3 favourite small caps

Blue chips are often seen as some of the safest shares in the share market. But, what you may gain in safety you lose in potential growth.

It’s very hard to grow a market capitalisation from $50 billion to $100 billion. It’s much easier to grow a market capitalisation from $100 million to $200 million.

The problem for small cap businesses is that a lot of people believe that they are riskier and therefore should be avoided.

I believe that if you want to beat the market you have to include some small caps in your portfolio.

Here are my three favourite small caps:

Propel Funeral Partners Ltd (ASX: PFP)

Propel is a newly listed funeral company, it operates in the same industry as InvoCare Limited (ASX: IVC).

I think that Propel has got a great future ahead because it’s starting off its listed life with a much smaller market share than InvoCare. Propel can make a lot of acquisitions over the years to generate growth, whereas InvoCare is mostly relying on organic growth.

But, it looks as though the funeral industry will generate a lot of organic growth as the number of deaths in Australia grows each year.

Zenitas Healthcare Limited (ASX: ZNT)

Zenitas is a healthcare provider in three segments, homecare, allied and primary. It is the homecare and allied care segments that I’m excited about due to Australia’s ageing population.

Most stakeholders of a patient’s health would prefer to avoid going for a costly hospital visit, which is where Zenitas comes in.

I believe that the business can generate very good organic growth with Australia’s ageing demographics. Management are also making clever bolt-on acquisitions to fuel growth further.

National Veterinary Care Ltd (ASX: NVL)

National Veterinary Care is a fast-growing business which is acquiring more clinics to build its network.

The pet industry is growing at a fast rate because the pet population is expanding and we’re willing to spend more on our pets through services and pet insurance.

I think National Veterinary Care has the potential to grow to at least 150 veterinary clinics, or more, which means it has a long growth runway ahead as its current number is only in the 60s.

Foolish takeaway

I’m a fan of all three small caps and it would be very hard to say which one will generate the most returns over the next five years. Zenitas is most likely the best value due to its low price/earnings ratio, but National Vet Care is the one I’d say will increase its bottom line the most during this time.

If you like the idea of small caps but want more growth ideas you should check out these hot shares.

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Motley Fool contributor Tristan Harrison owns shares of InvoCare Limited, NATVETCARE FPO, Propel Funeral Partners Ltd, and Zenitas Healthcare Ltd. The Motley Fool Australia owns shares of NATVETCARE FPO. The Motley Fool Australia has recommended Zenitas Healthcare Ltd. 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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