Small cap companies are able to grow quickly for several reasons. First, capturing meaningful increases in market share is easier when you are smaller. It is much easier to double market share from 5% to 10% than it is from 30% to 60%. Second, small cap companies in emerging industries typically face less competition for market share compared to larger cap companies operating in established industries. Third, fewer competitors means that companies can demand higher margins for their products or services until such time as meaningful competition is introduced and they have to start to compete on price.
There are many wonderful small cap companies growing at a rapid rate. Afterpay Touch (ASX: APT) is one example of a small cap company with high expectations for growth. However, you'll have to pay up for the privilege of owning the company at today's prices.
Here are 3 small cap companies that I believe are reasonably priced given their growth potential.
Money3 Corporation Limited (ASX: MNY)
Money3 Corporation provides financial services in the form of small cash loans, secured and unsecured personal loans, cheque cashing, and vehicle rental. Shares of Money3 currently trade at a Price to Earnings ratio of around 9.8. However, analysts are not forecasting much growth for 2018, if any at all, and is likely why shares are trading at reasonable multiples.
Codan Limited (ASX: CDA)
Codan is engaged in the development of electronic solutions for government, non-government, and consumer markets. Its businesses include radio communications, metal detection, mining automation, and defence electronics. The company current trades at a PE of 10.5. Analysts have forecast a decline in earnings per share for 2018 which may be why they are reasonably priced for a strong company.
Super Retail Group (ASX: SUL)
Retailing has been on the nose for some time now and as an industry offers some of the best value on the ASX. Super Retail Group own and operate a number of Australian retail brands including Rebel Sport, Supercheap Auto, Ray's, and Boating Camping and Fishing (BCF). Combined, Super Retail Group operates over 630 stores across Australia, New Zealand and China. Shares currently trade at a PE of around 9. Despite weak guidance, analysts are forecasting a very small increase in earnings per share in 2018.
Foolish takeaway
Small cap companies have room to grow and benefit from less competition which can help to maintain higher margins. Money3 Corp, Codan, and Super Retail Group look to be 3 small cap companies that are very reasonably priced and could still grow meaningfully from here.
