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3 small cap stars for your watchlist

I think the small-end of the market is home to a good number of companies with potential to grow significantly in the future.

While not all these companies will deliver on their potential, three which I think have a strong chance of doing so are listed below.

Here’s why I think they should be on your watchlist:

Auscann Group Holdings Ltd (ASX: AC8)

If the Australian healthcare sector embraces medicinal cannabis use, then I think AusCann could profit greatly. The chronic pain management industry, for example, is worth an estimated $5 billion a year in Australia. And this is just one of many markets the company is targeting. I believe it is the best positioned medicinal cannabis company in Australia to compete in these markets due to its sizeable production capabilities, strong management team, strategic ties with cannabis giant Canopy Growth Corp, education program, and first-mover advantage. But it is still early days and a fair bit of success appears to be priced into its shares already. This arguably makes them one of the riskiest shares on the market.

Collection House Limited (ASX: CLH)

Collection House is a receivable management company that has had a tough couple of years. But the good news is that there are signs that it has successfully turned its performance around. In fact, so much so that this year the company expects to grow its earnings per share by between 23% and 24% year-on-year. If it delivers on its guidance it means its shares are changing hands at a lowly 8.5x earnings. I think this offers investors a compelling risk/reward.

Supply Network Limited (ASX: SNL)

The share price of this after-market parts supplier to the commercial vehicle industry has had a strong 12 months and recently touched on an all-time high. Despite this strong run I don’t think it is too late to consider a patient long-term investment. This year Supply Network expects to generate sales of approximately $111 million and earnings before interest and tax of $11.5 million. This will be a 13.5% and 16% increase, respectively, on FY 2017’s result. Based on this, I estimate that its shares are trading on an undemanding multiple of 19x estimated full-year earnings.

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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 Supply Network 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 Scott Phillips.

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