3 Reasons I Buy Small Cap ASX Shares
I’ve invested in many small cap ASX shares over the past five years.
Some have sunk like rocks.
Some went through the roof.
But most of them performed well.
To me, a ‘small cap’ is a company that’s worth less than $1 billion. Although some analysts might argue that small caps are sub-$200 million companies when you’re investing in global shares a $10 billion company might be considered quite small.
Apple Inc is currently worth more than $US907 billion!
Here are 3 reasons I like to invest in small-cap ASX shares (please note: my first ASX share idea for Rask Invest is, in my opinion, one of the ASX’s best small-caps — and I still think it’s undervalued).
1. They’re typically considered to be higher risk.
Small companies are typically considered to be ‘riskier’ than larger companies. I agree. I think the typical small-cap is riskier than the typical blue chip. But it’s certainly not always the case.
For example, the first small-cap ASX share I recommended to Rask Invest members earns the majority of its revenue from long-term contracts with clients in the healthcare sector. These clients rely on the software day-in-day-out to keep their facilities running effectively and safely.
Compare that business model to, say, a mid-sized lithium or graphite mining company. These commodities are ‘hot’ at the moment but many of them have little to show for their $500m+ valuations.
2. Fewer analysts follow them.
According to IIR Analyst, Mark Tobin, Goldman Sachs recently released a report on the ASX Small Ordinaries Index. The ASX Small Ords is the index which tracks companies outside of the top 100. Nearly half of the companies in the index have less than 5 analysts following them.
Better still, that number has been falling.
When fewer analysts provide in-depth research on a company it means fewer large investors will discover its potential. That could give investors like you and I an edge over the competition. As Tobin writes, “Stocks with fewer analysts coverage have generally lower valuations (on a price to book basis) than those who had good analyst coverage.”
According to The Wall Street Journal, Commonwealth Bank of Australia (ASX: CBA) has 15 analysts following its shares day-to-day. They provide an opinion on just about everything that CBA says or does.
With so many people following CBA, it’s much harder for us to develop what I like to call a variant perception, which simply means seeing something that other investors cannot.
By contrast, the first ASX investment idea I released to Rask Invest members has 2 analysts following it.
3. Growth potential.
It’s tough to stomach this but so many large Aussie companies have failed to expand overseas.
Insurance Australia Group Ltd (ASX: IAG), National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Wesfarmers Ltd (ASX: WES)… the list goes on.
However, many smaller Aussie companies have room to grow both in Australia and abroad. As noted above, these companies tend to fly under the radar.
For example, one ASX share idea I released exclusively to Rask Invest earns more of its revenue outside Australia. Despite that, the US market alone is worth $US2 billion per year. This tech company has stolen 5% market share from massive rivals like Philips and General Electric since 2012.
It’s little wonder why its share price is up more than 1,500% in 5 years.
If you know what you are looking for I think the ASX is a great hunting ground for small-cap investors who want both growth potential and dividend income.
With potential multi-bagger returns up for grabs, you can see why I’m targeting ASX small cap share ideas for Rask Invest — and why I buy into the share ideas I release to Rask Invest members 5 days later.
I’m very happy to eat my own cooking!
Cheers to our financial futures!
P.S. Want to join our free Investor Club? You can get your hands on my analysis for free by signing up here. When you join I’ll forward you my investing ebook, “What Warren Buffett’s Investment Checklist Can Teach Aussie Investors” — free of charge. No credit card or payment required.