I'm a big fan of both buy and hold investing and small cap investing.
Combined, I believe they have the potential to generate significant wealth if you can identify a small cap share that has the potential to grow into a large cap in the future.
One of my favourite examples of this is printed circuit board design software provider Altium Limited (ASX: ALU).
A decade ago Altium's shares were changing hands at just 32 cents, whereas today you'll need to fork out $35.70 if you want to pick up shares.
This means that investors that bought shares in August 2009 would have earned a whopping ~112x their money excluding dividends.
Based on this return, a $10,000 investment in Altium's shares would now be worth a massive ~$1.1 million. And if you include the dividends it has paid over the last decade, this return stretches to around $1.2 million.
Whilst it is important to remember that very few small cap shares will be as successful as Altium, I believe there are a number on the local market that have the potential to generate outsized returns over the long term.
Three that I think investors should watch closely are as follows:
LiveTiles Ltd (ASX: LVT)
LiveTiles is a digital workplace platform provider that allows its users to create dashboards, employee portals, and corporate intranets with ease. In FY 2019 the company recorded a massive 167% increase in annualised recurring revenue (ARR) to $40.1 million. Looking ahead, management appears confident the strong growth can continue and aims to grow its ARR organically to $100 million by the end of June 2021.
Serko Ltd (ASX: SKO)
Serko is a fast-growing provider of online travel booking and expense management software. Like LiveTiles, it was an impressive performer in FY 2019. Thanks to strong demand from some of the biggest companies in the ANZ region and growing recurring revenues, Serko delivered a 28% increase in its full year total operating revenue to NZ$23.4 million. In FY 2020 the company expects total operating revenue growth in the region of 20% to 40%.
Straker Translations Ltd (ASX: STG)
Another small cap share to consider is Straker Translations. It is a translation services platform provider which uses a mix of human and artificial intelligence to provide highly efficient services at scale. In FY 2019 the company reported a 44% increase in revenue to NZ$24.6 million. More solid growth is expected in FY 2020 as the company makes in-roads into a global market which is expected to be worth US$66 billion per annum by 2022.
