In this research article, we will show you 3 small-cap stocks that we think are the best to buy on the ASX in 2019.
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 market correction towards the end of 2018, small-cap and growth stocks have been hit hard.
However, in early 2019, the market rallied and we saw a lot more appetite for small-cap stocks.
This has created lasting momentum and investors are excited about small caps again.
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.
I’ve outlined 3 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.
Electro Optic Systems (ASX EOS)
Electro Optic Systems (ASX EOS) is a stock that specialises in electro-optic design and development for the Aerospace and Defence markets.
EOS recently started making money selling specialist space and defence equipment to sovereign clients.
They also have 2 years worth of production backlog. This means they have revenue for another 2 years – even if they don’t get another order (which they will).
EOS is also partnered with Lockheed Martin to build space debris tracking systems.
Since looking at the stock in April, EOS has rallied more than 48% and continues to be a great stock to buy.
Cann Group (ASX CAN)
Cann Group (ASX CAN) is a growing medicinal cannabis company with great potential. Cann Group is 22.9% owned by Aurora Cannabis, one of Canada’s biggest Cannabis stocks with a market cap of $13.19B.
With a fully-integrated business model, Cann is able to do research, development, cultivation, manufacturing, packaging and finally provide their products in Australia and globally.
Even though Cann Group has not performed well in the past due to high fixed costs in its early growth stage, we think the CAN share price has strong potential.
FY18 was the first year Cann started generating revenue and they recently announced plans to expand production by 50,000kg per annum.
This will be the largest facility in Australia.
Since the announcement, the CAN share price rallied more than 50% off its lows.
Volpara Health Technologies (ASX VHT)
Volpara Health Technologies Ltd (ASX VHT) is a New Zealand-based healthcare research and development company with global scalability.
The company provides medical software, specialising in managing breast screening and detection.
Volpara’s SaaS system manages the flow of information between the clinic taking the screening mammogram x-ray and the doctor.
VHT adoption of the SaaS business model was announced in the recent AGM presentation. The SaaS model has seen revenue increase at an astonishing rate of 1,945%.
Since we first looked at VHT in September 2018 back when the price was under 80 cents, the stock has rallied to as high as 1.94 before pulling back to 1.60.
People Infrastructure (ASX PPE)
People Infrastructure Ltd (ASX PPE), a workforce management company, provides contracted staffing and human resources outsourcing services in Australia and New Zealand.
PPE is a leader amongst its peers with high growth in profitability and share price. PPE is well positioned to take advantage of the casualisation of the workforce.
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 2019? 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.
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.