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3 small caps with big potential

The share market is full of interesting businesses but some have an advantage over others. The biggest companies are already nationwide businesses, it becomes very difficult to grow from a market capitalisation from $50 billion to $100 billion.

It’s a lot easier for a business with a market capitalisation of $250 million to double it to $500 million.

That’s why small caps can generate outsized returns compared to large caps. With that in mind, here are three ideas:

Paragon Care Ltd (ASX: PGC)

Paragon is a small cap healthcare business that provides equipment, devices and other items to aged care facilities, hospitals and other healthcare providers.

It is steadily acquiring more healthcare businesses so that it can supply more of the needs of its clients. Hopefully growing in size through acquisitions will lead to bigger economies of scale.

The ageing tailwinds of Australia and New Zealand will likely lead to growing earnings over time.

It’s currently trading at 15x FY18’s estimated earnings.

Propel Funeral Partners Ltd (ASX: PFP)

Propel is the second largest funeral operator in Australia. It sadly has a good future due to the rising death rate of Australia because of Australia’s ageing population.

As the saying goes, there’s only two things certain if life: death and taxes. And you can’t invest in the Australian Tax Office.

Propel could perform well over the next few years because it’s likely to go on an acquisition spree to quickly ramp up its market share and earnings.

Propel is currently trading at 25x FY18’s estimated earnings.

Apiam Animal Health Ltd (ASX: AHX)

Apiam is a small cap veterinary business that services the rural areas of Australia. It isn’t just about treating pet cats and dogs, but also pigs, cattle and other animals. It has a somewhat growing tailwind with livestock as Australia’s food exports are growing.

It is also starting to set up co-located vets in Petstock retail stores in regional locations like Bendigo. Apiam will own 80% and Petstock will own 20% of this enterprise.

Its shares have fallen to $0.75 from $0.93 in recent times. It’s currently trading at 15x FY18’s estimated earnings.

Foolish takeaway

I believe all three shares will generate sizeable returns for investors over the next five to ten years, although they might be a bit more volatile because they’re small caps.

It’s hard to pick a winner. The acquisition strategy could go wrong for Propel and Paragon, whilst there is no guarantee of success for Apiam with its co-location strategy. I’d personally go for Paragon, due to its more-defensive earnings.

Another exciting small cap stock is this business which is just expanding into Asia and is predicting profit growth of 25% this year.

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Motley Fool contributor Tristan Harrison owns shares of Paragon Care Limited and Propel Funeral Partners Ltd. The Motley Fool Australia has recommended Paragon Care 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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