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3 top small cap shares with strong growth potential

Although small cap shares carry more risk than their blue-chip peers, I think a little exposure to the small cap space can be a great thing for portfolios.

You only need to look at the performance of the S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) over the last 12 months to see this.

During this time the small cap index has gained over 20% compared to a modest 5% gain by the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

With that in mind, here are three small cap shares that I think investors should take a closer look at:

ELMO Software Ltd (ASX: ELO)

ELMO is one of the region’s leading providers of integrated cloud-based human resources and payroll software solutions. The company’s platform provides organisations with a centralised approach to managing an employee’s lifecycle from hire to retire. Demand for its platform has been increasing at an impressive rate and has led the company to vastly outperform its prospectus forecasts. This year ELMO is on track to achieve EBITDA of $5.7 million, up almost 370% on FY 2017 and more than double its prospectus forecast. While acquisitions have played a key role in this performance, organic growth has also been exceptionally strong.

Macquarie Telecom Group Ltd (ASX: MAQ)

Don’t let the word telecom put you off, Macquarie Telecom is anything but a slow growing Telstra Corporation Ltd (ASX: TLS) equivalent. Thanks to its Hosting (Cloud Services) segment the company delivered a 30% increase in half-year net profit in February. The seismic shift to the cloud has been the driver of this growth and makes Macquarie Telecom a great alternative to the high-flying Nextdc Ltd (ASX: NXT) in my opinion.

Zenitas Healthcare Ltd (ASX: ZNT)

One of my favourite small cap options in the healthcare sector is Zenitas Healthcare. It provides home care and health services across the country giving it exposure to Australia’s ageing population. It was also a big winner from the recent Federal Budget which pledged to support older Australians that wish to stay at home instead of going into aged care. I think the tailwinds it is experiencing will put it in a position to grow strongly over the next decade, making it a good buy and hold option.

Bonus ideas.

Here are three more small cap shares with enormous long-term growth potential.

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Motley Fool contributor James Mickleboro owns shares of NEXTDC Limited. The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO and Telstra Limited. The Motley Fool Australia has recommended Zenitas Healthcare Ltd. 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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