Although small cap shares are riskier than their blue chip counterparts, I believe a little exposure to them can be a good thing for a portfolio. Especially if you can pick out one with mid cap or even large cap potential.
A prime example of this is printed circuit board design software provider Altium Limited (ASX: ALU).
Just over six years ago Altium had a market value of around $60 million, whereas today its value is approaching $3 billion. Investors that bought Altium shares in 2012 and held onto them until today have been rewarded incredibly handsomely.
However, it is worth remembering that not all shares will be a successful as Altium and many small cap shares may never fulfil their potential.
Three which I think have a chance of following in the footsteps of Altium are listed below. Here’s why they could be worth adding to your watchlist:
Atomos Ltd (ASX: AMS)
Atomos is a recently-listed global video technology company that enhances video content creation by producing monitor-recorder products that connect the imaging and computer worlds together. I believe it is well-positioned to benefit from the forecast growth in original content spending and the rise in professional-amateur content creators and expect solid sales growth over the coming years. This year sales are expected to increase 18.5% to $42.25 million.
ELMO Software Ltd (ASX: ELO)
ELMO is a leading provider of cloud-based human resources and payroll software solutions. Thanks to strong demand for its software, it recently reported first quarter cash receipts growth of 91% on the prior corresponding period to $10.3 million. Due to the quality of its product and its large addressable market, I feel confident that there will be more of the same over the course of FY 2019 and beyond.
Megaport Ltd (ASX: MP1)
Megaport is a provider of elastic interconnection services to a wide range of blue chip customers across data centres globally. Thanks to growing footprint and increasing demand due to the cloud computing boom, Megaport recently reported a 20% increase in its monthly recurring revenue to $2.4 million.
James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ELMOSFTWRE FPO. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended ELMOSFTWRE FPO. 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.