3 smaller players that could feed your portfolio big returns

While keeping pace with the movements of the big end of town is the name of the game, it pays to have your eye on emerging players if you really want to net some big gains.

Brokers have taken the time to analyse these emerging smaller caps for a reason, find out the details below.

Codan Limited (ASX: CDA)

Foster Stockbroking has slapped a buy on electronic product designer and manufacturer Codan Limited after the company posted a FY18 profit upgrade and major contract win.

Codan announced a $9.5 million contract win at BHP Billiton Limited’s (ASX: BHP) Olympic Dam through its Minetec segment earlier this month – the company will provide an underground fleet management system to enable high-precision tracking and safety monitoring at the site.

The contract value will boost the returns of FY18 and FY19 according to Codan, with a trading update revealing FY18 NPAT to be in the region of $38 million due in part to strong metal detector product sales and new product releases.

Codan boasts a strong balance sheet, with no debt and net cash of $20 million as at April 30, 2018, with Fosters believing such figures will likely indicate a special dividend is in the pipeline for shareholders.

Fosters has a price target of $3.40 on Codan, which closed on May 25 at $2.90.

One to watch as the company keeps netting contract wins with strong trading conditions indicating a possible upside for some time yet.

Kidman Resources Ltd (ASX: KDR)

Fosters has labelled copper, gold and rare earth element explorer and developer Kidman Resources Ltd as a buy after Kidman announced its first binding blue chip offtake agreement for its Mt Holland Lithium project with US EV carmaker Tesla Inc.

The agreement with Tesla is for the supply of lithium hydroxide from its downstream refinery in Kwinana  – operated by Western Australia Lithium – with a three-year fixed price take-or-pay which will protect both Kidman and Tesla from falls or rises in lithium prices.

The interest from the brand name of Tesla has led to Kidman entering discussions with other parties for the balance of its refinery offtake which may result in similar agreements being made with other companies that could prove lucrative for Kidman.

Fosters has a $2.78 price target on the stock – an upgrade from $2.72 – with Kidman shares sitting at $2.23 when the market closed on Friday.

Pinnacle Investment Management Group Ltd (ASX: PNI)

Financial services company Pinnacle Investment Management Group Ltd has been labelled as a hold by Ord Minnett after the $893 million market cap company outperformed the small industrials by more than 20% over the fourth quarter of 2018 with Pinnacle trading on a headline FY19 PE of 29x.

Pinnacle’s third quarter performance came in softer than expected, but Ord Minnett think the company bounced back in its fourth quarter labelling the company an “incredibly well-run multi-affiliate business” proving itself by attracting good managers and building a solid distribution force.

Pinnacle will be worth keeping an eye on as funds under management continues to grow with Ord Minnett forecasting $5 billion in net inflows over the next two years and $4 billion in FY21.

Ord Minnett has a $5.19 price target on Pinnacle – which closed off May 25 trade at $5.45 – with the broker believing the stock had “quality growth” potential but was “fully priced”.

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Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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