Cheap small cap stocks can be hard to find. Typically, they have a market capitalisation of between $50 million and $500 million. These smaller companies can get a bad rap for being more volatile than their larger ASX counterparts. However, there are a couple of great reasons to look at small cap stocks to add to your portfolio.
Firstly, they offer some potentially higher speculative returns. Secondly, they don't always move with the main market, such as the S&P/ASX 200 Index (ASX: XJO). This can sometimes be a blessing in disguise.
The ASX 200 Index is looking a little flat right now. So, while it decides which direction it wants to move in, take a look at these two cheap small caps that are showing potential.
2 cheap small cap stocks to consider buying
BSA Limited (ASX: BSA)
About BSA
BSA Limited is a technical services organisation. It provides solutions to help clients implement the physical assets in the areas of building services, infrastructure and telecommunications. BSA runs its business and services through three main divisions – BSA Build, BSA Connect and BSA Maintain.
Additionally, BSA provides consulting services through its BSA Think arm. Consulting helps clients realise solutions by enabling them to tap into a knowledge and innovative ideas database in the following areas:
- Asset management
- Design and building information modelling (BIM)
- Energy management and sustainability
- Cost planning
- Project management
- Compliance and certification
BSA has a market cap of around $116 million.
Opportunity
The BSA share price is currently selling for 27 cents at the time of writing. This is a substantial discount of more than 40% to its September 2019 highs of 46 cents. One thing I noticed about the BSA share price is that it has bounced higher several times before after reaching levels of 23 to 27 cents.
We are currently in that area of value again and, I believe, it's an opportunity to pick up this small cap stock at a great price. A bounce here could see it back at levels higher than 40 cents, resulting in potential returns of 40% or more.
Financially, BSA is in a healthy position with assets exceeding liabilities. Consider BSA as one of the cheap small cap stocks for your portfolio.
Ava Risk Group Ltd (ASX: AVA)
About Ava
Ava Risk Group is a leading provider of risk management services and technologies. It services clients in the commercial, industrial, military and government sectors.
This company delivers solutions that are high tech and complex. It helps clients tackle risk management threats to perimeters, pipelines and data networks. Using bio metrics, card access control and locking, as well as secure international logistics, storage of high value assets and risk consultancy services, Ava delivers a suit of solutions.
A point to note about Ava is that it actually has a group of companies with specialist skills under its brand:
- Future Fibre Technologies – a fibre optic, intrusion detection and location system specialist.
- BQT Solutions – a security card, bio metric reader and electromagnetic lock developer, manufacturer and supplier.
- Ava Global Logistics – a risk management specialist firm targeting the international logistics market.
Ava has a market cap of around $73 million.
Opportunity
The Ava share price had been largely sitting in the range of 10 to 20 cents for around three years. In 2020 however, the Ava Risk Group share price has risen more than 100% to currently trade at 33 cents at the time of writing. Interestingly, the last time the Ava share price tried to break past the 30 to 36 cents range in 2016, it failed and fell back down to lows of around 15 cents. So we now have another opportunity to try and break past this resistance level. Breaking up and above 36 cents could see the share price attempt to revisit the previous lofty heights of more than $1.00 it saw in 2015.
Financially, Ava is in a healthy position with assets exceeding liabilities.
Foolish takeaway
Cheap, small cap stocks can sometimes bring a world of trouble with them. These companies are often new or struggling financially.
The difference with these two companies is that they are financially healthy with asset bases exceeding their liabilities. Additionally, they have established businesses and client bases.
Buying small caps is no different to buying larger companies in that investors still need to do the appropriate research before jumping in. However, investors do need to be aware that smaller companies can often be more volatile than large caps. But having a small amount of exposure to cheap small caps in your portfolio can prove very rewarding if they perform well.
