Three cheap small caps for your watch list

For attractively priced growth plays, look to the smaller end of the market.

Catherine Baab-Muguira

Catherine Baab-Muguira is a Fool.com.au analyst/writer. A Fool since 2010, she comes at investing by way of being a compulsive reader and has a keen eye for detail from years of working as a freelance journalist. In 2012, she joined the Motley Fool's Analyst Development Program to pursue her love of investing full time, and worked as an analyst on one of The Motley Fool’s US services before heading down to Australia. A graduate of the University of South Carolina and the University of Auckland, she has lived and worked all over the world, including year-long stints in Singapore and New Zealand. Hence her great love for nyonya laksa and the All Blacks. We’ll forgive her that last one!

Published July 16, 2013 12:20 pm AEST

In the ASX market, attractively priced growth plays can be hard to come by, especially in the large cap sector. While Flight Centre's (ASX: FLT) future prospects and continued international expansion have appeal, for instance, the shares are hardly cheap at over 20 times earnings.

Fortunately, the smaller end of the market offers a number of growing companies trading at more attractive valuations. Consider small cap company Vision Eye (ASX: VEI), which owns and manages eye clinics and surgeries in New South Wales, Queensland and Victoria. The company returned to profitability in 2012 following a tough 2010 and 2011, yet shares are trading for just 9 times earnings, and about 2 times sales.

Jumbo Interactive (ASX: JIN) also looks attractively priced, given the company's recent expansion into Mexico, the U.S. and Germany. The company's online lottery ticket sales model looks to be highly exportable, and considering the overall value of the new markets – Jumbo estimates these new markets are worth over $70 billion in terms of total lottery sales – there seems a long runway of growth ahead. Meanwhile Jumbo shares are trading for 16 times trailing earnings. While full year 2013 earnings are likely to be lower because of some accounting changes and costs associated with expansion, Mr. Market still appears to underestimating the long-term growth prospects.

Another reasonably priced (not incredibly cheaply priced) small cap is 1300Smiles (ASX: ONT), which aggregates dental offices as well as offers low-cost dental plans. The company has recently expanded into new markets domestically, has plenty of room to grow further, and its shareholder-friendly management seems determined to reward investors who stick with the company over time. Against this, the shares trade for 22 times earnings and on an EV to EBITDA basis of about 12, while paying a fully franked dividend in the 3% range.

Though of course past performance is no indication of future returns, shares of 1300Smiles have over the last five years vastly outperformed the overall market, as measured by the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO), rising 160% versus a 3% rise in the index, not including dividends.

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Motley Fool contributor Catherine Baab-Muguira does not own shares of any company mentioned here.

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