Investors hunting for market-beating stocks often turn to ASX small caps.
Small-cap (small-cap) stocks typically refer to companies with a market capitalisation of up to $2.5 billion.
There are some large-capitalisation companies on the ASX that have performed incredibly well over the long run. However, when such companies reach a certain size, it becomes increasingly difficult to get much larger. For example, CSL Ltd (ASX: CSL) is up more than 660% since 2005. But, with a market capitalisation of $117 billion, the next 660% is likely to be much more challenging.
If you're looking for your next 10-bagger, you'll likely need to buy a small-cap stock. Since these companies are much smaller, there is more room to grow and make a larger profit.
However, with the potential for higher returns comes higher risk. Other possible disadvantages include lower liquidity and higher share price volatility. Dividends can also be less certain, with such companies preferring to reinvest their earnings into the business. Therefore, they may be less appealing to individuals such as retirees who are after a reliable income stream.
For those willing to look past these risks and chase higher returns, here are two small capitalisation companies with serious market-beating potential to consider.
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Aussie Broadband Ltd (ASX: ABB)
Aussie Broadband is Australia's fifth-largest telecommunications provider. It sells NBN connections across residential, enterprise, government, and wholesale markets. The company has been expanding its market share and challenging the dominance of the country's telecom incumbents, including Telstra Group Ltd (ASX: TLS).
Aussie Broadband made its debut on the ASX in October 2020. Since then, it has charged more than 100% higher while paying out a dividend along the way. In its most recent half-year result, it delivered 6.8% revenue growth to $588.5 million and 8.9% underlying EBITDA growth to $65.8 million. This was driven by a 12.5% increase in total on-net broadband connections to 727,951, which is impressive.
Broker Ord Minnett expects the company to continue this trajectory, projecting double-digit earnings growth in FY25 and FY26. With a market capitalisation of $1.2 billion, it classifies as a small-cap stock. There's certainly scope for Aussie Broadband to become a much bigger company.
Regis Healthcare Ltd (ASX: REG)
Regis Healthcare provides residential aged care services in Australia.
The company benefits from several tailwinds.
Firstly, Australia's aging population. Between 2000 and 2020, the population aged 85 years and over increased by 110%, compared with the total population growth of 35%, according to the Australian Bureau of Statistics. The Australian Government's 2023 Intergenerational Report forecasts the number of individuals over the age of 80 in Australia to triple over the next 40 years. The average age of admission into aged care is 83 for men and 85 for women. As a result, demand for residential care is likely to skyrocket.
The second tailwind is increased government funding. The New Aged Care Act is set to come into force on 1 July 2025. It will increase funding to cover 94% of the care-related costs, with residents increasing co-contribution on non-care aspects. This includes everyday living and accommodation. This legislation will boost returns for care facility providers such as Regis Healthcare, which has historically struggled with rising labour costs of aged care workers.
Finally, Regis Healthcare is benefiting from improved occupancy. In the most recent quarter, occupancy improved from 94.9% in Q4 FY24 to 95.5% in Q1 FY25.
Regis Healthcare has performed incredibly well over the past five years, rising more than 400%. However, with a market capitalisation of $2.3 billion, it is still a small-cap stock with the potential to become a significantly larger company. In April, Macquarie listed Regis Healthcare as one of its top three stock picks in the healthcare sector.
