Having some exposure to the small side of the market can be a good thing for a balanced portfolio, if your risk tolerance allows for it.
After all, the potential returns from small-cap ASX shares can be significantly greater than those on offer with large caps.
With that in mind, here are two small-cap shares that Morgans thinks could rise strongly from current levels. Let's see what it is recommending:
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Clinuvel Pharmaceuticals Ltd (ASX: CUV)
This biopharmaceuticals company disappointed Morgans during the first half, with softer-than-expected revenue growth and higher-than-expected cost growth.
However, the broker remains positive, especially given that this small-cap ASX share trades on lower-than-normal multiples.
As a result, the broker has put a speculative buy rating and $13.00 price target on its shares. This implies potential upside of 30% for investors from current levels. It said:
CUV delivered a softer result that landed below expectations, with top line underperformance and operational cost growth materially outpacing revenue. The combination of slower revenue growth, heavier opex, FX drag, and margin compression makes for an underwhelming print relative to expectations.
While fundamentally cheap with a large cash balance providing valuation support and trading well below historical multiples, the outlook continues to hinge on clinical catalysts and a change in sentiment (strategic direction driven) which we view is unlikely to shift meaningfully in the near term. Minor downgrades due to higher OpEx base and adjustments to WACC. Our target price reduces to A$13 (from A$14) but retain a SPECULATIVE BUY recommendation.
Readytech Holdings Ltd (ASX: RDY)
Another small-cap ASX share that Morgans is positive on is enterprise software company Readytech.
While it also delivered a half-year result that was softer than expected, the broker remains bullish due to its cheap valuation and strong sales pipeline. It has a speculative buy rating and $2.20 price target on Readytech's shares, which suggests that upside of almost 80% is possible over the next 12 months. Morgans said:
RDY's 1H26 result and revised outlook came in softer than expected, with Underlying EBITDA of $17.5m / Cash EBITDA of $7.5m ~6% behind MorgF. Whilst RDY's enterprise strategy remains on track, the group indicated that increased churn in 1H26 along with more protracted implementation/sale conversion have led to an FY26 guidance downgrade and the withdrawal of its longer-term targets.
Whilst we downgrade our FY26-17 EBITDA forecasts by 10-20% reflecting revised guidance, given RDY's robust pipeline, potential catalysts (VIC TAFE decision and likely increased corporate appeal), we move to a SPECULATIVE BUY rating, with a revised price target of $2.20/sh (previously $3.00/sh).
