I think that small cap ASX shares could be great buys right now.
Small caps have a lot of potential. They are a lot earlier on in their overall growth journey compared to a blue chip. ASX small caps could deliver a lot of growth. Sometimes they are valued lower than larger peers because many investors haven't discovered them yet.
I believe a small cap has a market capitalisation of less than $1 billion. You could argue that small caps are ones worth less than $500 million or $300 million, but I think $1 billion is a good milestone.
With that in mind, here are three small cap ASX shares I'd be willing to buy today:
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BWX Ltd (ASX: BWX)
BWX is a natural beauty business with a variety of growing brands. It's generating strong performance at the moment – in FY20 net revenue rose 26%, the gross margin increased to 58%, earnings before interest, tax, depreciation and amortisation (EBITDA) climbed 30% and statutory net profit increased 59%.
A pleasing aspect of BWX is that its multiple brands have multiple growth avenues. Sukin is largely based in Australia, but it's now expanding overseas. Andalou Naturals and Mineral Fusion are American brands that are now growing internationally as well.
Sukin, the most important brand, is becoming increasingly available to mass channels in the USA and Europe, which led to revenue growth of 55% last financial year.
The small cap ASX share is looking to build a new manufacturing hub which will help future growth. It's expecting revenue and EBITDA growth of at least 10% in FY21.
At the current BWX share price it's trading at 34x FY21's estimated earnings.
City Chic Collective Ltd (ASX: CCX)
City Chic is another Aussie business growing globally.
It's a retailer of plus-size clothing, footwear and accessories for women. FY20 was a disrupted year with COVID-19 causing store closures. This is during a period of significant growth and investment for the company.
The small cap ASX share's focus on providing a good online experience has really helped over the past seven months. In FY20, 65% of its total sales were online, and online sales grew by 113.5% compared to FY19.
It's no longer just an Australian bricks and mortar retailer. The company is seeing growth of its northern hemisphere business thanks to organic growth as well as targeted acquisitions. The northern hemisphere accounted for 42% of its global sales, up from 20% in the prior year.
It was recently unsuccessful with its bid for Catherines, a US competitor which was in financial difficulty. However, I like the strategy of trying to buy competition during this period because it means it can get it for a cheap price and turn that brand into an online-only offering. I'm sure management are looking for another target to try to buy.
At the current City Chic share price it's trading at 23x FY22's estimated earnings.
Australian Ethical Investment Limited (ASX: AEF)
Australian Ethical is one of the most promising fund managers on the ASX.
The small cap ASX share is consistently growing its funds under management (FUM), whereas other fund managers are seeing mixed FUM performance and a regular outflow of funds.
In FY20 it saw net profit increase by 46% to $9.5 million with underlying profit after tax growing by 42% to $9.3 million. Excluding the impact of a $3.6 million performance fee, revenue and underlying profit after tax both increased by 15%.
Two of the most promising statistics related to its FUM. It experienced net inflows of $660 million (up 100%) and 19% growth of FUM to $4.05 billion.
There is a growing trend of people looking for ethical investments, ones that do good for the world, or at least don't have negative impacts on the world. A key factor of Australian Ethical is that it's a superannuation provider. That means it's exposed to the useful mandatory contributions and tax-advantaged system. As it scales it can reduce fees for investors, making it more attractive and could attract further FUM.
The Australian Ethical share price has fallen by around 50% since 19 June 2020. I think now is a good opportunity to buy it at a much cheaper price than before despite the small cap ASX share's growth prospects still being strong.
