Although small-cap stocks tend to have much more risk and volatility than blue chip stocks, with a certain exposure to small caps and their potential upside potential, strong upside potential can be added to your portfolio.
A compliment of small-cap investments in a blue chip portfolio may be the shot needed to add that extra 5-10% to capital growth that you probably will not see with major players like Commonwealth Bank, Wesfarmers and QBE.
The best smallcap stocks currently on sale are generally driven by three factors within the markets. Understanding these forces helps us time the market and buy or sell small-cap stocks at the most appropriate times.
The three major driver's for smallcap stocks
In general, markets and stocks are first driven in the short term through imbalances between supply and demand. This is the day-to-day order flow because investors buy and sell shares for various reasons. This order flow is generally difficult to predict and requires strong technical analysis and insight into the underlying market for good time use.
Share capital is particularly difficult to predict on a technical basis. This is because institutional investors tend to stay away from small-cap stocks because of investment mandates and general lack of liquidity. With the lack of institutional investors, small cap stocks are driven more by rumors and private investors, who tend to invest emotionally more in equities than institutions that tend to trade on logic.
Secondly, markets and equities are driven by macroeconomic forces in the medium term. Factors include, but are not limited to, changes in interest rates, consumer confidence, government policy, and so on. Understanding the nuances and how the different countries interact in terms of trade and politics is the key to understanding the forces that drive the markets as a whole.
Small caps have a tendency not to be strongly influenced by macroeconomics and are less correlated with macroeconomic events. This is because small caps are often valued qualitatively rather than quantitatively. In other words, small-cap stocks are valued for speculation about potential non-existing growth and income rather than what they earn today. However, the macroeconomic environment is still very important: understanding what they sell, who they are selling to and who their established competitors are helping us understand the potential growth of the business.
Finally, shares are driven by fundamentals in the long term. 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, working environment, political and policy environment.
Fundamentals are of great importance because we make assumptions and valuations based on the environment they will use in the future. In unstable or highly regulated environments, understanding the potential pitfalls is the difference between buying a small cap share with potential and one that is doomed to failure.
In order to buy the best smallcap stocks now, it is essential to combine market timing, macroeconomic and fundamental analyzes.
Research is the key to finding the best Small Cap stocks now to buy
The most difficult part of investing is the ability to process a large amount of information and factors to navigate through the macroeconomic and fundamental environment. Our research team has worked hard to find the best smallcap stocks that are now on the ASX for sale on a macroeconomic and fundamental basis.
In the short term, based on market timing, this is more difficult and requires patience, skills and experience. Contact one of our advisers for more information on how to time items.
I have outlined 5 stocks that we have identified as having good growth potential and a great story and these represent some of the best opportunities the ASX has to offer.
Zip (ASX Z1P) – Zip (ASX Z1P) is a digital, point-of-payment and fast-growing payment solution that works in the buy-now-pay-later sector, similar to AfterPay. Just like AfterPay (ASX APT), Zip shares are used in the fast-growing digitization of the traditional lay-out that stores have offered in the past, potentially offering phenomenal growth for early investors. Zip shares are a great alternative if you are looking for a different APT without paying the price APT goes for.
Pioneer Credit (ASX PNC) – Pioneer Credit Limited (ASX PNC) is a financial services provider specializing in the acquisition and maintenance of retail debt portfolios. The company has grown strongly in the last two years and there are no signs that this will slow down. PNC grew by 90% + year on year and surpassed the sector, we expect ASX PNC shares to have a bright future.
Wattle Health (ASX WHA) – Wattle Health Australia Limited (ASX WHA) was founded in 2011 and is a vertically integrated milk powder and baby formula provider based in Melbourne Australia and also one of the largest milk formula export companies in Asia (China, Macao and India). With new deals inventoried in Asia, Wattle Health could be the next big milk supply after A2 Milk (ASX A2M) and Bellamy (ASX BAL).
Let your money work harder for you
Choosing the best stocks to buy now, determining the timing and having a head start on the market is not easy. Our goal at MF & Co. is to make this process more accessible and easier for our customers. Download our special report below for another 5 best stocks to buy now, which comes with a special strategy we use for our customers to make your money work harder for you.
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced professional in equities, derivatives and financial markets with over 12 years of experience. Henry specializes in building trading algorithms and systems, quantitative and qualitative analyzes in macroeconomic, fundamental and technical disciplines and currently manages the MFAM VPAC AU / US model portfolio. The Management Partners and Advisory Team have decades of experience between them, with experience from large Investment Banks and Brokers. Their consultants have a lot of experience and have treated some of the richest customers in Australia.