One of the best ways to beat the returns of the ASX could be to go for cheap shares.
Cheap can mean a variety of things. It could mean a cheap price compared to the net tangible assets (NTA) or it could mean businesses are trading on a cheap multiple of their earnings, for example.
Another way investors try to beat the market is by going for smaller shares. Small caps have larger potential growth runways and are generally under researched.
If we combine those two ideas together and find cheap small caps then that could be a winning combination.
These two could fit the bill:
Paragon Care Ltd (ASX: PGC)
Paragon Care is currently trading at 9x FY19's estimated earnings. It is a small cap healthcare distributor that sells items like beds and devices to clients such as hospitals and aged care businesses.
It has gone through a number of capital raisings and acquisitions in recent times, so it's tough to get a good read on the business. However, with the ageing tailwinds and high single digit organic growth expected, it's possible Paragon could steadily grow profit for many years to come.
One particular positive about Paragon is its single purchasing platform. That can provide excellent growing economies of scale, which should lead to the various profit margins increasing.
A handy bonus is that Paragon has a grossed-up dividend yield of 7%.
Think Childcare Ltd (ASX: TNK)
Think Childcare is trading at perhaps around 10x FY19's estimated earnings. It's an owner and operator of childcare centres. The industry has been smashed in recent history due to oversupply and uncertain conditions with government funding.
However, the 'cowboys' are now apparently leaving the sector, the government's new support is coming into the system and occupancy levels are rising.
If investors see that childcare profits are rising again then sentiment could return to the share price of Think Childcare.
Its trailing grossed-up dividend yield of 6% looks attractive too.
Foolish takeaway
Both of these shares could be market-beaters over the next year or two, particularly with the attractive income that the offer. Out of the two, Paragon would definitely be my favourite due to the purchasing platform and potential for long-term growth.
