If you're looking to add a little more firepower to your portfolio, small cap ASX shares can be a great place to look.
While they tend to carry higher risk than their large-cap counterparts, they can also deliver outsized returns when things go right — especially when backed by strong fundamentals and broker support.
With that in mind, here are three small cap ASX shares that brokers are tipping for big things in the years ahead.
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Lovisa Holdings Ltd (ASX: LOV)
The first small cap ASX share to consider buying is Lovisa. It is a fast-fashion jewellery retailer with a global store rollout strategy that continues to gain traction.
One broker that is particularly bullish is Macquarie, which has an outperform rating and $33.40 price target on its shares.
Its analysts note strong like-for-like sales momentum and margin expansion. The broker also sees recent executive changes as a chance to improve the business's cost base and efficiency. And with international store growth still in the early innings and a capital-light model that generates strong returns on equity, Lovisa is well positioned to grow earnings over the long term.
Nick Scali Ltd (ASX: NCK)
Another small cap ASX share that analysts are tipping as a buy is Nick Scali. It is a premium furniture retailer that has grown strongly over the years thanks to disciplined store rollouts, high margins, and a strong brand presence. It is now looking to replicate that success offshore, including a push into the UK market.
Macquarie is also feeling very positive about this small cap and has put an outperform and $18.60 price target on its shares. The broker highlights its margin strength and capital management as key reasons to be positive.
And while retail can be cyclical, Nick Scali's strong returns on capital and strategic growth plans make it one of the more compelling retail picks out there.
Smartgroup Corporation Ltd (ASX: SIQ)
A final small cap ASX share to look at is Smartgroup, which is a leading provider of salary packaging and fleet management services. At the last count, it had over 400,000 salary packages and 64,000 novated leases under management.
Bell Potter is very positive on the company. So much so, it has named the small cap ASX share on its Australian Equities Panel. The broker believes that Smartgroup "looks well priced given a fwd P/E of ~14.5x, a defensive client base, earnings tailwinds from the Electric Car Discount Bill (exempts low or zero emission vehicles from Fringe Benefits Tax), an ROE of ~30% and a strong balance sheet."
The broker has a buy rating and $10.15 price target on its shares.
