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3 ASX small caps on brokers’ buy list

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has powered 0.5% higher on Tuesday with almost every sector finishing in the black.

But it’s junior stocks that are stealing the show as the S&P/ASX SMALL ORDINARIES (Index:^AXSO) (ASX:XSO) has jumped by over 1% today as risk appetite returned to the market.

As long as investors remain comfortable with stomaching macroeconomic risks, small caps are likely to keep outperforming. On that note, there are three emerging stocks that brokers are touting as “buys” today.

Bad flu season a positive for funeral services

The first is Propel Funeral Partners Ltd (ASX: PFP) even though the PFP share price is trading at a 52-week high.

Bell Potter doesn’t think it’s too late to jump on board given the severe warnings from health authorities about this flu season.

“The level of flu activity can provide a reasonable gauge of death volumes in first world markets, particular those with an aging demographic such as Australia,” said Bell Potter.

“The flu season typically peaks in August, but lab-confirmed cases of influenza have been higher than usual so far this year. PFP’s larger listed peer recently provided a trading update that noted a continued normalisation of death volumes to the long-term trend. We believe PFP will experience a largely similar trend.”

Bell Potter has a “buy” recommendation and a $3.54 12-month price target on the stock.

Detecting value in the Codan share price

Another small cap that’s tipped to outperform is communication technology and metal detector maker Codan Limited (ASX: CDA).

The CDA share price has jumped recently after management upgraded its earnings guidance and Moelis sees further upside for the stock.

“At ~13x P/E, [Codan’s] IP remains undervalued in our view, especially when factoring the Minetec division is yet to be monetised and the Group’s balance sheet capacity (~$30m net cash) remains undeployed,” said the broker.

“We have raised our FY20e NPAT by 5.4% to $45.5m, reflecting our increased confidence in the Group’s ability to generate incremental earnings from a suite of new product releases in Metal and Radio, as well as positive contribution from the Tracking Solutions division.”

Moelis has a “buy” rating on Codan and a $3.90 per share price target.

Nurturing an attractive valuation

The third small cap to watch is Think Childcare Ltd (ASX: TNK). Management reaffirmed 2019 guidance, and According to Canaccord Genuity, the TNK share price is attractively valued at around a 13 times price-earnings for calendar 2019.

“TNK’s first four months of the year saw revenue increase by 7% on pcp, which was mainly driven by higher fees while the number of days sold (proxy for occupancy) was in line with pcp. YTD service margin rose 2.2%, which was largely due to wage management,” said the broker.

“TNK as well placed given the increase in demand for childcare services, combined with our expectation of easing supply growth in 2H19.”

Canaccord reiterated its “buy” call on the stock with a $2.11 price target.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Propel Funeral Partners 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.

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