Should you buy these small cap shares?

One of the best performing areas of the Australian share market over the last 12 months has been the small cap space.

During this time the S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) has put on a whopping gain of 17%.

While I don’t necessarily expect the same level of return over the next 12 months, I do think there are several small cap shares with the potential to outperform.

With that in mind, are these three small cap shares in the buy zone?

Capilano Honey Ltd (ASX: CZZ)

This leading Australian honey producer is currently valued at approximately $150 million but has the potential to grow into a significantly larger entity in the future if it can crack the lucrative China market. The company’s progress in China has been a touch underwhelming, but earlier this year it appointed an experienced marketing executive team to assist with its expansion. I’m watching Capilano very closely but, with its shares looking fully valued now, until I see a significant lift in sales in China I’ll be holding off an investment.

ELMO Software Ltd (ASX: ELO)

ELMO Software is a cloud-based talent management software solutions provider with a fully diluted market capitalisation of approximately $360 million. While its shares are starting to look a little on the expensive side after a stellar share price rally over the last 12 months, it could easily grow into this valuation if its strong business performance continues. This year the company is on course to achieve total revenue of $31.2 million and EBITDA of $5.7 million for FY 2018, an increase of 84% and 368% respectively on the prior corresponding period.

Volpara Health Technologies Ltd (ASX: VHT)

Volpara Health Technologies is a fast-growing breast imaging analytics and analysis product provider which has been growing its share of the U.S. market at a quicker than expected rate. At the last count, approximately 3.2% of all women screened in the United States for breast cancer were contracted to Volpara’s software. Thanks to the quality of its technology and its growing popularity, I expect management to hit its market share target of 9% by the end of FY 2019. This should lead to strong top line growth that goes some way to justifying the premium its shares trade at today.

Finally, here are three more small cap stars that have been kicking goals this year and I think are in the buy zone right now.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO. The Motley Fool Australia owns shares of Capilano Honey Limited and VOLPARA FPO NZ. 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 Scott Phillips.

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