5 Best Small Cap Stocks To Buy For 2020 [ASX Research]

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.

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.

Read more about Karoon Energy here.

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.

Read more about Electro Optic Systems here.

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.

Read more about Cann Group here.

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.

Read more about Pilbara Minerals here.

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.

Read more about People Infrastructure here.

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.