5 Best Small Cap Stocks ASX 2023 [Best Penny Stocks]

small cap stocks to buy

Henry Fung

Henry is a co-founder of MF & Co. Asset Management with over 19 years of experience as a trader, investor and asset manager. Henry is the instructor of the Professional Trading Course, which is a free 5-day course on how to become a profitable trader.

July 26, 2023

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Today, we’ll look at some of the best penny stocks to buy on the ASX for 2023.

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.

The Best Small Cap Stocks ASX 2023

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 2023 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.

Sayona Mining (ASX:SYA)

Sayona Mining (ASX:SYA) is an up-and-coming multi-asset miner based in Australia.

The company is on the verge of commencing operations at its Northern American Lithium (NAL) project in Quebec.

The company has had a head-spinning 1670% rally since its acquisition of NAL in December 2020 and brought it online in record time and at budget.

While the stock has been soft this year with a 21.1% underperformance to the ASX200 due to a correction in lithium prices, it is still rather fairly valued with a high chance of a serious re-rating once it commences downstream production and develops other assets.

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Read our research on Sayona Mining (ASX:SYA) and how it made our best small caps stocks list.

Core Lithium (ASX:CXO)

Core Lithium (ASX:CXO) is an Australian mining company aiming to become one of the biggest exporters of lithium to the Asian region.

The company has seen its stock skyrocket a monumental 887% over the past 12 months due to the ever-increasing price of lithium and substantial progress towards the commencement of production.

The company claims it will be one of the lowest-cost lithium spodumene producers in the world once its Finniss mine enters production.

The project is also highly capital-efficient, given that its production is based on the simple DMS process which uses just gravity and water.

This is two-thirds cheaper compared to the floatation process.

Moreover, the Finniss project is now fully funded.

The company will potentially enter production in 2H’FY22 and produce about 197,000 mtpa.

Read the research on how Core Lithium (ASX:CXO) made our best Australian shares to buy 2023 list.

Arizona Lithium (ASX:AZL)

Pepper Money (ASX:PPM)

Arizona Lithium Limited (ASX:AZL) is an Australia-headquartered mineral exploration and development company focused on exploring for lithium at its Big Sandy and Lordsburg Projects in the states of Arizona and New Mexico respectively in the USA.

The company has identified a current resource of 320,800 tons of Lithium Carbonate Equivalent (LCE) from 4% of the landholding at Big Sandy.

Testing has achieved high-quality battery-grade Lithium Carbonate of 99.8% purity (Battery Grade > 99.5% purity) at Big Sandy.

Read the full article on how Arizona Lithium (ASX:AZL) made our best Australian shares to buy 2023 list.

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Nitro Software (ASX:NTO)

Nitro Software Limited (ASX:NTO) is a global leader in document productivity software and digital transformation.

Its offerings are relevant in a world that has pivoted to work-from-anywhere, anytime, and on any device.

The company’s Nitro Productivity Platform is a solution to legacy document procedures that are a handicap in such a dynamic environment.

Nitro is changing its revenue and product offerings models by transiting to SaaS-based offerings available off a productivity platform.

Read more about why Nitro Software (ASX:NTO) is one of the best penny stocks.

Magnis Energy Technologies (ASX:MNS)

Magnis Energy Technologies (ASX:MNS)

Magnis Energy Technologies (ASX:MNS) is an Australian company involved in the development of cheap and nearly 100% recyclable batteries that address the global decarbonization megatrend.

Magnis Energy Technologies is developing its product through strategic partnerships to garner expertise in various segments of the battery value chain.

Its proprietary battery is claimed to outperform current technologies while being cheaper and environmentally friendlier.

The company also has great verticals, with an investment in a high-quality long-life mine.

Read the full report on how Magnis Energy Technologies (ASX MNS) made our best small cap stocks ASX 2023 list.

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.

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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.

Are you looking for more stocks to buy? In our opinion, buying the right stock at the right time is just half the battle – knowing how to manage the position and risk is just as, if not more important. Take our free 5-day trade like a professional course, it give you the foundational knowledge required to become a profitable trader.

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.

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