5 Best Small Cap Stocks ASX 2021 [Best Penny Stocks]

Today, we’ll look at some of the best penny stocks to buy on the ASX for 2021.

Even though these stocks are not “penny stocks” per se (this is more of an American term), I consider any stock under $1b in market cap to be a small cap or penny stock.

Small cap stocks tend to have much more risk and volatility involved than blue-chip shares.

They are almost much higher risk than high growth stocks driven by revenue growth that generally have a larger cap.

However, having exposure to the best small cap stocks and their potential upside can add strong upside potential for your portfolio.

With historically low interest rates and the boost it is giving to capital markets, the best penny stocks with their higher sensitivity to the market are in favour right now.

Additionally, as markets continue to recover, the best small cap stocks with much higher beta means returns are outsized compared to blue-chip shares.

The Best Small Cap Stocks ASX 2021

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 to find the best penny stocks.

Our Research team has been hard at work uncovering the best small cap stocks on the ASX in 2021 on a macroeconomic and fundamental basis.

We’ve outlined 5 stocks that we have found to either have good growth potential or a great story and what we consider to be some of the best penny stocks on the ASX.

We believe these represent some of the best opportunities the ASX has to offer.

Allegiance Coal (ASX:AHQ)

Allegiance Coal Limited is an Australian mining company in the metallurgical coal sector.

While COVID was initially harsh on miners for fears of slowing economic growth, lower demand, and mine shutdowns, these companies are back in the reckoning due to potential global spending on infrastructure and expectations of an economic recovery.

As more of its production comes online, Allegiance Coal shares will benefit from rising met coal prices.

Steel is one of the biggest inputs in large-scale and industrial infrastructure projects, and this has turned the tide for miners of metallurgical coal, a key input in steel production.

Although Allegiance Coal is an Australian company, it will not suffer from China’s ban on Australian coal imports as its mines are located in North America, thus positioning it as a beneficiary from China’s large planned infrastructure spends.

Read the full article on how Allegiance Coal (ASX:AHQ) made our best Australian shares to buy 2021 list.

Freelancer (ASX:FLN)

Freelancer Ltd (ASX:FLN) is an Australia-based online freelance portal with a worldwide reach.

The company, a pioneer of the gig economy has since morphed into the largest freelance portal by the number of users.

The company’s growth plateaued in the years leading up to the pandemic due to stiff competition from rivals such as Toptal, UpWork and Fiverr.

However, the pandemic was a shot in the arm for the company and revitalized its business due to the transition to online and remote work.

The company benefited from a massive rise in demand for popular gigs due to the acceleration of digitisation caused by the pandemic.

Read the full report on how Freelancer (ASX FLN) made our best small cap stocks ASX 2021 list.

MoneyMe (ASX:MME)

MoneyMe (ASX:MME) is an Australian financial technology company that provides an array of lending services.

The company’s AI-enabled procedures for fast and safe approval of loans led to significant growth because the pandemic triggered an accelerated structural shift from offline to online transactions.

The company has been successful at differentiating its products from other fintechs; it also offers products in some niche but high potential segments.

At the current MME share price, MoneyMe shares have a market capitalization of A$247 million.

Though the stock is down 19.2% from its pre-COVID price, the company has made significant progress in the past three quarters and pivoted to a minor profit in the first half of 2021.

We believe the MME share price is at an inflection point and MoneyMe shares present an investment opportunity.

Read our research on MoneyMe (ASX:MME) and how it made our best small caps stocks list.

Sequoia Financial Group (ASX:SEQ)

Sequoia Financial Group (ASX:SEQ) is a financial services company based in Australia.

The company offers a host of financial and corporate services ranging from company establishment and pension services to asset management and brokerage.

The stock has been in the news lately due to its sharp 280% rally commencing March last year.

The surge in its stock has been driven by successful acquisitions and increased stock market activity since the onset of COVID.

Technically, the SEQ share price appears to be revving up for a breakout from its essentially sideways move since December.

At the moment, Sequoia has a lower PE and 2-3x higher ROE than its peers such as Clearview Wealth (ASX:CVW) and IOOF Holdings (ASX:IFL).

With zero debt, the company has a strong balance sheet primed for more acquisitions and is likely being overlooked by institutions due to its small market capitalisation.

Read the research on how Sequoia Financial Group (ASX:SEQ) made our best Australian shares to buy 2021 list.

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.

Read more about why RAIZ Invest (ASX RZI) is one of the best penny stocks.

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.

Penny 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 penny stocks to buy, it is essential to combine market timing, macroeconomic and fundamental analytics.