The small cap world sounds like a dangerous place to most investors and even more dangerous to those who don’t follow shares.
However, it could be the best place to find long-term growth shares. It is exceptionally difficult for a business like Commonwealth Bank of Australia (ASX: CBA) to double its market capitalisation – it is a huge business.
It is a lot easier for a business that has a market capitalisation of $200 million, or less, to double in size. Plus, very few analysts cover smaller shares.
That’s why I own these three small caps in my portfolio:
Paragon Care Ltd (ASX: PGC)
Paragon is a small cap healthcare business that supplies equipment, devices, beds and other products to customers like hospitals and aged care providers.
It operates a centralised system where clients can purchase whatever they need, kind of like a healthcare version of Amazon I suppose. Although it is nowhere near the quality of Amazon of course.
It is steadily acquiring other healthcare supplier businesses, which expands the range of products it can sell, hopefully increases the economies of scale and wins new customers that it can then sell all of its wares to.
It’s currently trading at 16x FY18’s estimated earnings.
National Veterinary Care Ltd (ASX: NVL)
National Veterinary Care is a small(ish) vet clinic business that is also steadily growing through acquisitions. The company has now reached more than 65 clinics and still has plans to keep acquiring for a number of years.
It has a veterinary management segment which means it can implement best-of-practice operations on new acquisitions, which should hopefully mean higher profit margins and higher customer retention rates.
Unlike its larger competitor, National Vet Care has generated organic revenue growth at its clinics of around 3% so far this year.
It’s currently trading at 23x FY18’s estimated earnings.
Propel Funeral Partners Ltd (ASX: PFP)
Propel is the second largest funeral provider in Australia. I believe it has long-term potential because death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. This doesn’t sound like much, but the compounding effects will hopefully be very beneficial over time.
It has made three acquisitions so far this year and plans to steadily increase its geographical footprint using this method.
It’s trading at around 26x FY18’s estimated earnings.
I believe all three shares are trading at attractive long-term value, so it’s hard to pick a clear favourite. Over the next three years I expect National Veterinary Care to do the best, but in the longer-term Paragon could benefit from synergy and the rising demand for healthcare products.
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Motley Fool contributor Tristan Harrison owns shares of NATVETCARE FPO, Paragon Care Limited, and Propel Funeral Partners Ltd. The Motley Fool Australia owns shares of NATVETCARE FPO. 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.