The Motley Fool

3 exciting small caps to watch in April

When you build an investment of portfolio of say 10 to 20 shares the majority of your holdings should be high-quality larger companies with blue-chip qualities, strong track records of profit growth, and superb outlooks supported by robust competitive positions.

However, for more experienced investors it’s worth taking a look at the small-cap end of the market as it’s companies with market values lower than $2 billion that have the most opportunity to produce eye-watering returns.

After all a company can go a lot faster from a $500 million company to a $5 billion company, than from a $50 billion company to a $500 billion company.

This is due to the law of large numbers and because the market values larger companies more conservatively. In other words they are unlikely to get the large valuation or profit multiple re-rating that can turbo charge a small-cap share price when delivered in conjunction with strong profit growth.

Take the US$900 billion tech giant Apple Inc. that trades on around 14x trailing earnings despite being arguably the world’s best company.

While a small-cap exhibiting signs of accelerating growth can easily have an earnings multiple up to 100x (despite having nowhere near the quality of Apple Inc) if investors believe it can double profits for a number of years in a row.

So here are three small businesses you should know about.

Pro Medicus Ltd (ASX: PME) is a software-as-a-service medical imaging business I’ve covered a lot over the last 4 years. It’s a founder-led market leader in lucrative global healthcare markets that is executing well, profitable, and boasts a strong track record of growth.

In fact it ticks all the boxes except perhaps valuation, therefore I’d rate it a hold for now. However, much cheaper, and it’s a buy.

Bigtincan Holdings Ltd (ASX: BTH) only has a $119 million market valuation, but is a software business that has partnerships with Adobe and Salesforce as the kings of online CRM systems. Bigtincan just entered a trading half to raise around $16 million to give it the balance sheet firepower to continue its organic growth push. It’s high risk, but could produce big returns.

Alteryx Inc. (AYX) is a founder-led NASDAQ listed U.S. data analytics company that is forecasting a profit in 2019 and is growing like nuts. I’m flagging it because it has a significant presence in Australia with customers like Commonwealth Bank of Australia (ASX: CBA), Telstra (ASX: TLS), the NBN Company and Australia Post.

It also has a blue-chip client list in the U.S. subscribing to its data-crunching platforms, which suggests its tech provides a moat or competitive advantage that bodes well for the future. The stock has run hot, but I’d rate this US$5 billion business a buy today.

Here are 3 more ASX Blue Chips To Buy In April

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked...

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2019."

Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free report.

Tom Richardson owns shares of Alteryx, Apple and Pro Medicus Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BIGTINCAN FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended BIGTINCAN FPO and Pro Medicus 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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!