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Why these 2 small-cap shares have doubled in value in a year

The ASX Small Ordinaries index has performed strongly over the past 12 months – up almost 16% compared to 9% for the S&P/ASX 200.

There have been a few standout performers in the small-cap index – notably the two companies below.

Clover Corporation Limited (ASX: CLV)

Clover Corporation has a market cap of about $259 million. It is engaged in the business of the refining and sale of omega-3 oils used in infant formula, supplements, and medical foods. As a mostly B2B business rather than a consumer brand-centric business, I think it represents a less risky play for investors than the pure infant formula businesses such as Bellamy’s Australia Limited (ASX: BAL) and Bubs Australia Ltd (ASX: BUB).

Clover had a cracking results season which didn’t seem to attract much attention. Revenue increased by 32% to $62.9 million and net profit increased by 109% to $7.6 million. The company also finished the financial year with a strong balance sheet and holding about $7.9 million in cash.

What I really like about Clover is the growth opportunities. The EU has passed legislation that all infant formula sold within its borders by 2020 must contain a prescribed minimum level of Omega 3. This provides Clover with a massive opportunity together with their investments in new products and manufacturing facilities.

Clover Corporation shares are trading at $1.58 on a PE of about 34 compared to Bellamy’s of 27 – so it is not cheap. However, it’s Price Earnings to Growth (PEG) ratio is about 1 so I don’t think the company is overvalued given its potential.

Nearmap Ltd (ASX: NEA)

Nearmap has a market cap of about $770 million. It provides geospatial maps and aerial imaging technology for governments and private enterprise clients in Australia, New Zealand, and the United States.

Nearmap’s earnings for 2018 were impressive – 2-year 35% annual compound growth in ACV (annual contract value) to $66.2 million in 2018. The share of revenue from US operations grew from 20% in 2017 to 26% in 2018 to $17.4 million. What’s exciting investors with Nearmap is the addressable market, which in the US alone is estimated to be worth over $1 billion.

Although the company reported an $8 million loss for 2018, this was largely due to increased expenditure on sales and marketing in the United States. The Australian operations reported a segment profit of about $22 million on sales of $42 million. This highlights the potential earnings powerhouse this business could be if it captures a material share of the US addressable market.

Nearmap shares are trading at $1.74. This is about 12 times current revenue. Investors are clearly looking at the growth potential of this business. However, achieving market dominance in America will not be easy. There are some dominant players like Eagleview and ESRI which will present competitive challenges for Nearmap. How well it executes on the US strategy will determine the share price trajectory over the next 12 months.

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Motley Fool contributor matthew reynolds owns shares of Clover Limited and Nearmap Ltd. The Motley Fool Australia owns shares of and has recommended Nearmap 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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