When chosen correctly, ASX small cap stocks give investors the opportunity to outperform the market substantially. Although the majority of small cap stocks produce negative average returns, investors should not be deterred from conducting their due diligence.
There are certain characteristics investors should look for when investing in ASX small cap stocks. Firstly, emerging sectors and investing themes are an important factor in determining longevity. Secondly, the companies need to have innovative products, services and sustainable business models. Lastly, a strong and proven management team is another indicator of the long-term prospects of a small cap stock.
Here are 3 ASX small cap stocks you should watch in 2020.
EML Payments Ltd (ASX:EML)
EML Payments is an Australian fintech company that provides the technology solutions for payouts, gifts, rewards and supplier payments. The company has a large presence in Australia, North America and Europe, issuing mobile, virtual and physical card solutions.
The EML share price has surged more than 203% in 2019 fuelled by strong earnings and several successful acquisitions. For FY19, EML reported a 283% growth in net profit after tax of $8.45 million and a 37% increase in revenue of $97.2 million. The company also completed the acquisition and integration of PerfectCard DAC and Flex-e-Card which contributed 32% to EBITDA.
EML recently completed a capital raising of $93 million in equity from its recent Retail Entitlement Offer. The company has a scalable business model and additional capital will allow EML to increase acquisitions and maintain a strong growth trajectory.
Audinate Group Ltd (ASX: AD8)
Audinate provides hardware and software solutions to the audiovisual (AV) market. The company’s flagship and award-winning Dante program is a global leader in AV connectivity, that eliminated the need for traditional analogue connections.
The Audinate share price is currently trading near all-time highs, having surged more than 159% for 2019. Audinate’s digital platform has emerged as a leader in the audio-visual sector, with the company’s products offering low latency and superior sound quality.
The company is well poised for future growth, boasting a growing portfolio of high-quality partners and an expanding pipeline of innovative products.
Infigen Energy Ltd (ASX: IFN)
Infigen is a renewable energy company that is well-poised to take advantage of the changing narrative of the energy sector. The company generates renewable energy from its wind farms in New South Wales, South Australia and Western Australia. Infigen also sources renewable energy from other third-party sources providing customers with reliable and competitive solutions.
The company reported an 11% increase in underlying earnings for FY19 of $165.3 million, whilst net revenue also increased 9% to $229.3 million. The biggest driver of revenue for Infigen was renewable energy generation, which climbed 20% for the year to 1,775 gigawatt hours (GWh).
The company is well poised for FY20, with 75% of its renewable energy generation already contracted. Infigen has a promising growth forecast and could attract large investors and institutions that want to increase their exposure to renewable and sustainable energy.
Should you buy?
In my experience, sustained positive price action reflects the prospects of a small cap stock as it indicates the money flow and sentiment. It is important that investors do their own due diligence to determine whether ASX small caps suit their strategy before making an investment decision.
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Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited. The Motley Fool Australia owns shares of and has recommended AUDINATEGL FPO. The Motley Fool Australia has recommended Emerchants Limited. 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.