Top brokers have slapped a “buy” on these two small cap stocks

Our market can’t shake the October blues with experts warning of more volatility ahead.

Australian shares have lost a lot of value since the start of last month but it’s the larger cap stocks that have taken most of the beating.

This says to me that the market weakness is driven primarily from global risk factors instead of domestic issues as shares at the bigger end of town are more severely impacted by international turbulence than small cap stocks.

Small caps punching above their weight

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has lost nearly 9% of its value since the end of September when the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX: XSO) is down 7%.

That two-percentage point difference may not sound like much but it’s a big deal and I think the small cap index has a better than even chance to keep outperforming their bigger brothers over the next three to six months (this is mainly because I think our big banks will struggle to perform in the short-term).

If you are looking for small cap buying opportunities, there are two stocks that have caught the eye of brokers recently.

Broker picks

The first is insurance broker AUB Group Ltd (ASX: AUB) with Credit Suisse adding the stock to its “buy” list after the AUB share price tumbled 12% over the past week.

A capital raising and worries about new regulations on the insurance industry have weighed on the stock but Credit Suisse thinks the stock will come bouncing back.

“There are current concerns around ASIC’s comments in their recent Royal Commission submission on the topic of banning general insurance comments,” said the broker.

“[But] the vast majority of an insurance brokers business is not in relation to retail products.”

Credit Suisse also believes that earnings growth is also starting to pick up again after slowing to around 5% a year in the last five years as AUB diversified its business.

But AUB posted growth of 6.2% in FY17 and 10.3% in FY18 as these investments rolled-off, and the broker believes this trend will persist.

Credit Suisse has a $14.50 price target on the stock.

The second small cap to watch is  aerial mapping technology company Nearmap Ltd (ASX: NEA). The NEA share price is surging 7.4% in later afternoon trade to $1.60 in the wake of its annual general meeting (AGM).

Management said it’s off to a strong start in the first quarter of FY19 and confirmed that it will be cashflow breakeven by this financial year.

Morgan Stanley reiterated its “overweight” recommendation on the stock following the AGM with a $2 per share price target on the stock.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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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