Top brokers have slapped a “buy” on these 3 small cap stocks

The dust from the reporting season is settling and it’s ASX small cap stocks that have emerged as the real winners!

The S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) rallied 6.3% over the past month when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 5.1%. Since the start of the year, the small caps index jumped 12.5%, or nearly 3 percentage points above the top 200 benchmark.

That’s a pretty significant gap but gains from here will be more difficult to come by for the smaller end of the market due to their greater exposure to the domestic economy.

Tougher outlook for small caps

The outlook for the Australian economy looks soggy at best while things are starting to look up internationally with media reports that China and the US likely to end the trade war soon.

The Brexit challenge could also take a backseat as the UK looks increasingly likely to defer its departure from the European Union and/or hold a second referendum on its exit. It’s kicking the can down the road but that could be enough to turn sentiment in the region.

But this isn’t to say that there aren’t good small cap stocks worth buying in this climate. In fact, there are three that brokers seem taken with after the reporting season.

Tide rising for Austal

The first is Austal Limited (ASX: ASB) with Macquarie Group Ltd (ASX: MQG) impressed with the shipbuilder’s rising margins.

“Management guidance implies $1.9b revenue, with 7-8% US shipbuilding margin. This suggests margins in the core business (80% of 1H19 EBIT) will be stable or stronger in 2H,” said the broker.

“Recent investment in the Australasian shipyards has increased throughput capacity and is expected to drive efficiencies that should translate to further margin expansion in 2H19 and beyond.”

What’s more, Macquarie thinks the company’s outlook commentary is conservative and has reiterated its “outperform” recommendation and $2.60 price target on the stock.

The Austal share price is up around 13% since the start of the year.

Small scratch for AMA

The second stock in brokers’ good books is panel beating and auto accessories company AMA Group Ltd (ASX: AMA).

The group’s first half net profit grew 30% to $9.9 million and that was a little below what Bell Potter has expecting but this wasn’t enough to change the broker’s “buy” rating on the stock given the AMA share price is around 25% below the broker’s $1.25 price target.

UBS also acknowledged that there were a few “kinks” to iron out but that AMA Group has “multiple growth drivers”. The broker reiterated its “buy” recommendation on the stock with a $1.35 price target.

Treasure not trash for Bingo Industries

Another small cap stock that UBS likes is Bingo Industries Ltd (ASX: BIN), particularly now that the ACCC has approved its acquisition of Dial-A-Dump.

Bingo has also surprised the market by announcing a $75 million on-market share buyback.

UBS has a “buy” recommendation on the Bingo share price with a $2.55 price target.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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.

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