I think that having a little exposure to the small cap side of the market can be a good thing for a portfolio if your risk profile allows for it.
After all, the potential returns on offer with small caps are vastly superior to those of their blue chip peers.
However, not all small caps live up their potential. And for every Afterpay Touch Group Ltd (ASX: APT) success story, there are multiple abject failures like Reffind Ltd (ASX: RFN).
The key to success, in my opinion, is choosing small cap shares with strong business models, large addressable markets, and the ability to scale easily.
Three small caps that tick a lot of boxes for me are listed below. Here's why I like them:
Audinate Group Limited (ASX: AD8)
Audinate is a digital audio-visual networking technologies provider. In FY 2019 it delivered a 44% increase in revenue and 395% rise in EBITDA. The key driver of this growth was the significant expansion of Dante product offering and increased adoption by Original Equipment Manufacturers (OEMs). I believe its technology is way ahead of the competition, putting it in a great position to continue this solid form for a long time to come.
Serko Ltd (ASX: SKO)
Another small cap share to watch closely is Serko. It is an online travel booking and expense management provider. Thanks to strong demand from new and existing customers, in FY 2019 Serko posted a 28% increase in total operating revenue to NZ$23.4 million. Pleasingly, 88% of this revenue is recurring. I believe this gives it a firm foundation to build on in FY 2020. Supporting this will be its recently announced extended partnership with Booking.com. The travel giant was also a cornerstone investor in a capital raising.
Volpara Health Technologies Ltd (ASX: VHT)
Lastly, a third small cap to consider is Volpara. It is a provider of healthcare software that uses artificial intelligence imaging algorithms. These algorithms are helping to assist with the early detection of both breast and lung cancer. It has been a very impressive performer over the last few years thanks to the growing popularity of its software with radiologists across North America. Due to the quality of its software, I expect this positive form to continue this year. Especially with the help of recent acquisitions.
