The famous fund manager Peter Lynch was known for following the stories of companies that would pop up near where he lived, and they would inspire him to find out how big they could actually get if they went nationwide. This is how he found companies that multiplied their share prices many times over as they opened in more and more cities.
What kind of prospects do the three micro-cap stocks below have? Could they spread out over Australia with their successful business models?
Capitol Health (ASX: CAJ) is the largest community-based medical diagnostic imaging service provider in Victoria. It acquired MDI Radiology in March, adding 13 clinics, to bring its total number of clinics to 51.
Over the past three years it has more than tripled its net profits after tax, and expects revenues to grow because government incentives for medical testing are shifting towards MRI scanning. With plans to expand into other areas, it could replicate the VIC market dominance in other cities and states.
Gaming systems and monitoring company Ebet (ASX: EBT) is showing how to hit the jackpot at developing network solutions for gaming machines. It doubled its net profit after tax from $2 million to about $4.8 million in 2013.
Its latest achievement is its Card IT service that has been tested and approved in Queensland, adding to the 100 venues in New South Wales that already use the technology covering 9900 machines. It allows players to transfer credits between machines and cash out without the need of an attendant.
FSA Group (ASX: FSA) is a financial services provider for debt solutions and direct lending. It assists clients in entering debt payment arrangements with creditors, possibly avoiding bankruptcy. It also offers loans to clients who might find it hard to meet regular lending criteria.
With the economy still recovering and the financial stress that some people may be under, this kind of service is growing. Also, the housing market improving, so more people who can't easily conform to lenders' requirements will be looking at their options with the company.
It has a 48% share of the debt agreement market. With credit card debt around its highest in 10 years, and the average debt to disposable income percentage well over 100%, there is likely a lot of future customers who will be needing help.
Foolish takeaway
These small business stories are where investors can follow a company as it builds up its model in one area, and when it can successfully transplant it into another, that's when the share price expands along with the business.
Maybe you didn't get in right at the beginning when the stock was really, really cheap, but you also didn't take on the risk of a fledgling company. These companies have shown their business works, and early followers could be well rewarded.
