3 small caps for your portfolio

Small companies fly under the radar, but can grow into big companies. Will these three?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published July 23, 2013 3:32 pm AEST

Here at the Motley Fool, we suggest that investors take a pyramid approach to their portfolios. It won't suite everyone's investing style, but is designed to give investors a solid safe base of stocks to hold for the long-term, with some stocks included to provide growth and a small percentage of the portfolio for speculative plays.

That means safe, large quality stocks make up a large proportion, with a smaller allocation to growth stocks and an even smaller allocation to speculative stocks. Should something go wrong with the higher risk stocks, the damage is limited to only a small portion of your portfolio, and your next egg doesn't disappear down the toilet.

Here are three ideas to consider for the speculative portion of your portfolio.

Scantech Limited (ASX:SCD)

Scantech manufactures and markets a range of scientific and industrial instruments for use in the coal, cement and minerals industries. The instruments are used to improve management of raw material and lower operating costs in ore processing plants. Today the company announced that it expected to report a profit before tax for the 2013 financial year of around $4.4 million. On rough calculations that sees the company trading on a P/E ratio of around 4, despite today's 50% plus rise.

Titan Energy Services (ASX:TTN)

Titan is a diversified oil and gas field services company, primarily focused on supporting the three LNG plants under construction in Gladstone. Titan also provides temporary accommodation, drilling, equipment rental and transport and logistics. Growing from one drilling rig, the company now operates four rigs, and has increased its accommodation capacity by 186% since 2012 to 674 rooms. In an earnings update released today, Titan said it expected earnings before interest and tax (EBIT) to jump 272%, while profit before tax climbed 303% from $3.3 million in 2012 to $13.3 million this year. With a market cap of $72.5 million, Titan is trading on a P/E ratio of 7.8 – not expensive for a company geared to our growing oil and gas sector.

Atcor Medical Holdings (ASX:ACG)

Atcor develops and markets a system that measures central blood pressures and arterial stiffness non-invasively, something that can't be measured using standard blood pressure monitoring. Atcor announced today that it expects to report its maiden profit in the range of $2.7 to $2.9 million for the 2013 financial year, on the back of $9 million in sales. The company's pharmaceutical sales rose 69% in the past year to a record US$6.1 million. Despite yesterday's 50% jump in share price, Atcor is still trading on a P/E ratio of just over 5. Should it be able to continue generating growth like it has, today's price will appear ridiculously cheap.

Foolish takeaway

While smaller companies are inherently more risky than the elephants on the stock market, they can juice up investors returns. As an example, over the past 12 months the ASX 200 Index (Index: ^AXJO) (ASX:XJO) is up over 21%, Scantech is up 41%, Atcor is up 52%, while Titan Energy is up a whopping 258%. You might want to add these stocks to your watchlist, as there could be plenty of growth left in them.

Savvy investors are now seeking growth in smaller companies. Discover two stellar small-cap opportunities now, in our brand-new research report, "2 Small Cap Superstars" — simply click here to download your FREE copy.

More reading

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.