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Megaport Ltd (ASX:MP1) among these 3 small cap shares backed by brokers

When seeking portfolio diversification, some investors like to put some funds behind more speculative picks.

Keep in mind, speculative stocks require a high-risk tolerance, and brokers themselves are quite reluctant to put too many bets on companies that still have a lot to prove.

But these 3 speculative companies have been named by brokers as either buys or holds, here’s why.

Megaport Ltd (ASX: MP1)

Canaccord Genuity has maintained its hold recommendation on $399 million market cap provider of network services, Megaport Ltd, with a price target of $3.80 on the stock.

Megaport’s share price is up 5.3% to $3.56 at the time of writing.

According to the broker, Megaport’s increased investment and focus on sales was evident in its first-quarter update for 2019 with the business clocking its largest quarterly increase in customers and monthly recurring revenue.

Its first quarter cash flow burn of $9.9 million was also lower than the $12.5 million and $11 million logged in the previous two quarters with operating costs stabilising and cash at $46.2 million.

These are some pretty strong fundamentals for an emerging company so you can understand why the broker’s interest was piqued here and it’s not too hard to believe Megaport will reach its forecast share price.

Lycopodium Limited (ASX: LYL)

Hartley’s has a buy rating on $179 million market cap engineering and project management consultancy, Lycopodium Limited.

The broker has a 12-month price target of $5.80 on the stock – Lycopodium’s share price was steady at $4.51 today.

According to Hartley’s, Lycopodium’s ability to achieve annual profit every year since listing in 2013 is commendable, and I’d have to agree, but obviously, its profitability is leveraged to the resources cycle, although Lycopodium has a number of potential contract wins in its pipeline.

Lycopodium’s Mondium joint venture with Monadelphous Group Limited (ASX: MND) is an upside, in the broker’s view, and a low-risk one at that.

The company’s cash flow generation seems to be in good health, so Lycopodium’s balance sheet is solid.

This is certainly one to watch.

Heron Resources Ltd (ASX: HRR)

Heron Resources is an exploration and mineral development company with interests in nickel, gold and base metals and a $151 million market cap.

This week State One Stockbroking has slapped a buy on the small cap with a target price of $1.40 – tipping the company as the ASX’s next “zinc producer about to fly”.

The basis of this rating by the broker is due to a forecast Heron will be one of only four zinc-focused producers listed on the ASX by the first quarter of 2019.

The broker believes, although the prices for zinc have primarily softened in recent months, the commodity has comfortably outperformed its base metal peer group over the past 5 years – and less competition in the market will give all players a boost to keep up with demand.

The broker’s high-risk speculative buy rating assumed zero project slippage, but if margins materialise as forecast during 2019, State One sees scope for its 33% risk-discount to unwind.

Don’t forget such a valuation is sensitive to underlying base metal prices if you’re looking into this one.

Heron’s share price was up 0.8% to 63c per share at the time of writing, so State One is suggesting a significant upside will be made soon.

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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.