Today, we’ll look at some of the best small-cap stocks to buy on the ASX for 2020.
Small cap stocks tend to have much more risk and volatility involved than blue-chip shares.
However, having some exposure to small caps and their potential upside can add strong upside potential for your portfolio.
With the historically low-interest rates and the boost it is giving to capital markets, small-cap stocks with its higher sensitivity to the market are in favour.
Additionally, as markets continue to recover, small-cap stocks much higher beta means returns are outsized compared to larger cap stocks.
The Best Small Cap Stocks To Buy Now
The hardest part about investing is the ability to process a large amount of information and factors to be able to navigate the macroeconomic and fundamental environment.
Our Research team has been hard at work uncovering the best small-cap stocks to buy now on the ASX on a macroeconomic and fundamental basis.
On a short-term, market timing basis, this is more tricky and is something that requires patience, skill and experience.
We’ve outlined 5 stocks that we have found to either have good growth potential and a great story.
We believe these represent some of the best opportunities the ASX has to offer.
RAIZ Invest (ASX RZI)
Today, we will look at why we like Raiz Invest Ltd (ASX RZI).
RZI is an emerging high growth company that operates RAIZ Invest, a leading mobile-first micro-investment and savings platform.
The company was initially started by Acorns, a successful micro-investing company in the US with over 7m clients.
RAIZ Invest is an innovative solution that utilizes its simple to use and appealing platform to get millennials to start investing.
RZI has over 320,000 active customers, up 52% over the past year with $581m in funds under management (FUM).
With RAIZ’s expansion into Southeast Asia just starting, the upside potential for RZI is quite promising.
Bigtincan Holdings (ASX BTH)
Bigtincan is a leader and innovator in the Software as a Service (SaaS) provider of sales enablement software with core operations in Sydney and sales headquarters in Boston.
The company’s software organises and delivers automation and productivity tools for employees, in other words, software that provides sales team with resources to close more deals.
This is a service that will have tremendous growth as the workforce shifts towards digital sales coaching, as opposed to physical classrooms, even after the COVID pandemic.
With the advent of working from home and the growth in digital and technology solutions, the shift from classroom to digital sales coaching will continue to grow now and into the future.
Some estimates forecast that up to 55% of sales training will be digital by 2021.
The global SaaS market is estimated to be US$68.2 billion in 2020, with a Compound Annual Growth Rate (CAGR) of 18.2% over the next 7 years.
In addition, Bigtincan has also leveraged its products towards the mobile sector, another industry with strong growth.
Bigtincan is well placed to leverage multiple high growth sectors and is a stock that we think has strong potential.
Karoon Energy (ASX KAR)
Karoon Energy is a Melbourne-headquartered energy company.
The company was initially an oil and gas exploration company and is now on the verge of entering into the hydrocarbon-based energy production sector.
The company has energy exploration assets in Brazil, Peru, and Australia.
Although the spread of the coronavirus has battered the entire energy sector and cast a cloud over its prospects, Karoon is relatively unscathed compared to other energy players as all its energy assets are in the exploration phase and the company has no production income at this point.
The company is also in a very liquid position with nearly half a billion dollars in cash.
In July of 2019, Karoon announced that it had entered into a binding SPA (Sales and Purchase Agreement) with Brazilian energy giant Petrobras to acquire a 100% interest in the offshore oil block BM-S-40, which contains the Baúna oil field in the Santos Basin, for a consideration of $665 million.
The oilfield produces about 19,000 barrels of oil per day.
Opthea (ASX OPT)
Opthea Limited is an emerging healthcare company that specialises in developing novel treatments for chronic eye diseases such as age-related macular degeneration.
Macular degeneration, also known as age-related macular degeneration (AMD), is the leading cause of legal blindness in Australia, responsible for 50% of all cases of blindness.
Opthea’s main focus is on its OPT-302 combination therapy which focuses on targeting wet age-related macular degeneration and diabetic macular edema.
Last year the company unveiled strong study results for OPT-302 which was shown to deliver statistically significant results in patients.
Opthea also anticipates the potential for the therapy to be used for Diabetic Macular Edema (DME), which is an even more lucrative market.
Combined, this gives OPT-302 a market opportunity of almost US$10 billion.
Earlier this year, Opthea was added to the S&P/ASX 300 index during June.
According to the company, Opthea’s inclusion to the index could help diversify the shareholder base as its OPT-302 advances through clinical stages.
Opthea has continued to demonstrate that its treatments are not only effective but address a debilitating condition that affects a significant percentage of the population, through its successful trials.
Over the past 5 years, the company significantly outperformed the ASX by 1,215%.
Pilbara Minerals (ASX PLS)
Pilbara Minerals Limited (ASX PLS) is an Australian lithium-tantalum mining and production company.
The company operates the Pilgangoora mine, located in the Pilbara region of West Australia.
The company plans to capitalize on the rapidly growing lithium market as the world moves to electric vehicles (EVs) and renewables.
The company made its first spodumene concentrate (unprocessed lithium) shipment from the Pilgangoora site in April 2019.
The site has a 23-year mine life at 5 Mtpa.
Spodumene concentrate is converted to lithium carbonate or lithium hydroxide for use in battery components.
The market for lithium, expressed in lithium carbonate equivalent (LCE), is expected to become structurally deficit from 2025 onwards.
Further, lithium hydroxide is becoming the preferred option for energy-dense batteries, and Chinese demand is growing strongly.
How We Find The Best Small Cap Stocks To Buy
In general, the markets and stocks are firstly driven on a short-term basis via supply and demand imbalances.
This is the order flow on a day to day basis as investors buy or sell shares for different reasons.
This order flow is generally hard to forecast and requires strong technical analysis and understanding of the underlying market to properly time.
Small cap stocks are particularly hard to forecast on a technical basis. This is because institutional investors tend to stay away from small-cap stocks due to investment mandates and general lack of liquidity.
With the lack of institutional investors, small-cap stocks tend to be driven more by rumours and retail investors. The lack of liquidity is also an issue.
Secondly, markets and stocks are driven by macroeconomic forces in the medium-term.
Factors include but are not limited to changes in interest rates, consumer sentiment, government policies and so forth.
Understanding the nuances and how the different countries interact with each other in terms of trade and politics is key to understanding the forces that drive the markets as a whole.
Small Cap stocks tend not to be too highly influenced by macroeconomics and are less correlated to macroeconomic events.
This is because small caps tend to be more qualitatively valued rather than quantitatively valued. In other words, small-cap stocks are valued on speculation as to the potential non-existent growth and earnings rather than what they are earning today.
However, the macroeconomic environment is still vastly important.
Understanding what they are selling, who they are selling to and who their established competitors help us understand the potential growth the company has.
Finally, stocks in the long-term are driven by fundamentals.
Factors include but are not limited to quantitative factors such as earnings growth, profit margin and return on equity.
Qualitative factors include factors such as competition, operating environment, political and policy environment.
Fundamentals are highly important as we make assumptions and valuations based on the environment they will be operating in the future.
In unstable or highly regulated environments, understanding the potential pitfalls is the difference between buying a small cap stock with potential and one that is doomed to fail.
To be able to pick the best small-cap stocks to buy now, it is essential to combine market timing, macroeconomic and fundamental analytics.
Make Your Money Work Harder For You
Picking the best small-cap stocks to buy now, timing the entry and having an edge in the market is not easy.
Download our special report below for another 5 best shares to buy now which comes with an options strategy we use for our clients to generate a consistent return.
Are you still looking for the best stocks to buy in 2021? We've put together a free report on 5 stocks that we think are the best buys on the ASX right now. Download it instantly here.
Want to join the discussion? Head over to our Facebook group and join 6,000+ other investors and traders discussing everything stocks and stock market related.
This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.