Before getting too deep into this article, it would be remiss of me not to point out that investing in small caps is an inherently risky exercise. Generally speaking, small cap companies are unproven: they may be making little or no profit and could still be in the early stages of commercialising an idea. And a shorter track record (or no track record at all) obviously makes any future successes far more difficult to predict.
If they do become one of the few small companies that go on to make big profits, you can triumphantly announce to your friends that you were there from the beginning, a true believer. But if they fail, or get beaten down by bigger competitors, or turn out to be mostly hot air – GetSwift Ltd (ASX:GSW) comes immediately to mind – then you'll probably react far more sheepishly when your friends ask you just how that investment you kept touting a few months ago is doing now.
So with that broad caveat out of the way, let's hope these three small cap recommendations aren't the type that will come back to haunt me in a few months.
Talga Resources Ltd (ASX: TLG)
With a market cap of just $133 million, materials and technology company Talga Resources is a pretty speculative play. Headquartered in Perth, but with most of its operations centred in Europe, Talga has plans to grow into a leading vertically integrated graphene producer: it operates a number of mines in Sweden, including the largest graphite resource in Europe, while its subsidiaries in Germany and the UK focus on graphene processing and R&D.
The fact that Talga owns the leading graphite deposit in Europe is one thing, but it's what the company intends on doing with it once it's extracted from the ground and processed into graphene that's really exciting. Graphene has the potential to be used for energy storage and conversion, and Talga was recently nominated in the innovation category at Berlin's annual Green Awards because of its unique plan to mix graphene with concrete in order to create a road capable of charging an electric vehicle. Imagine that: a future in which the car you drive is literally powered by the road!
AUDINATEGL/ORD UNRESTR NPV (ASX: AD8)
Growing digital audio company Audinate develops hardware and software solutions for the professional audio-visual industry. Its flagship product is a piece of technology called Dante, which enables users to easily set up even complex audio networks. Dante cuts down on latency times and simplifies audio networks, and it has won a number of international industry awards.
Audinate's share price has been on a tear recently – up over 60% so far this year – driven by strong first half FY19 financial results. Revenues surged 60% higher year-on-year to $14.2 million, with EBITDA rising from $0.1 million to $1.7 million. Demand for its Dante product has increased rapidly, with the company reporting a 59% uplift in units shipped during the half. Pleasingly, Audinate also reported healthy growth in repeat revenues, which shows that it is generating strong brand loyalty in its expanding customer base.
LiveTiles Ltd (ASX: LVT)
I've been following Australian IT company LiveTiles for a little while now, but so far the company's share price has failed to really take off. It is up over 40% since January, but at around $0.45 a share it is still well shy of the 52-week high of $0.755 it hit back in August of last year.
This is honestly surprising to me, because I feel like LiveTiles is going from strength to strength. In my mind, it's a seriously underappreciated growth company. In its first half FY19 results which it released last month, LiveTiles announced that it had grown annualised recurring revenues by 232% year-on-year to $22.9 million. Plus it declared that it had plenty of sales in the pipeline and ongoing joint marketing initiatives with international tech heavyweight Microsoft.
If it keeps posting results like this I feel like it might only be a matter of time before investors start to take notice.
