Towards the end of 2013, I identified a number of top growth stocks for 2014. Perhaps unsurprisingly, three of my top five picks could be considered small companies.
The reasoning behind my contention for a big year of small-cap growth is simple. Confidence is growing in global markets, interest rates here in Australia are low, blue chips are expensive and the S&P/ASX Small Ordinaries (ASX:XSO) – a collection of companies between the ASX300 and ASX100 – has been a serial underperformer, especially when compared to the S&P/ASX 200 Index (ASX: XJO)(^AXJO) over the past two years.
Source: Google Finance
So what would be my top five small companies at current prices? Here's a list of companies I believe hold value and growth potential at current prices.
Litigation funder Bentham IMF Ltd (ASX: IMF) yesterday reported a strong 63% rise in NPAT for the half-year ended 31 December 2013, but due to a negative judgement today, has fallen 2% in value – providing long-term investors a great entry price. Its earnings are on-and-off because cases are won and lost in court. However, it should be noted that this growing company has recently taken on more cases and has an impeccable track record of success. Since listing it has commenced 152 cases with 98 settlements, 35 withdrawals, 14 won and 5 lost.
Another exciting small-cap which I'm expecting to post a big 2014 (and 2015) is Newsat Limited (ASX: NWT). Newsat is Australia's only satellite communications company which currently provides telecommunications services to rural communities. However it has already secured hundreds-of-millions of dollars in pre-launch contracts on its Jabiru satellites expected for launch in the next 24 months. These will be extremely lucrative, at around 82% profit margins, and will open the company up to billions of dollars' worth of international contracts.
Since suffering numerous price falls in recent months, Cash Converters International Ltd (ASX: CCV) looks set to outperform in coming years. It has an expanding presence in the United Kingdom, Australia and New Zealand. It operates on good margins, balance sheets and strong dividends. The business recently suffered short-term setbacks as the regulatory environment for lending changed and the company announced a potential class action from New South Wales customers. Nevertheless, it remains a strong buy for long-term shareholders.
Donaco International Ltd (ASX: DNA) is a casino and hotel operator with assets in Lai Cao, Vietnam. It recently upped its ownership of the only fully licensed casino in the region (the next casino is over 450km away) to 95%, with a 20% purchase from the casino's current JV partner, the Vietnamese government. It is also planning a soft opening of its new, much larger and lucrative hotel in May 2014. Due to its proximity to China, Donaco's operations will benefit from the increasing number of middle-class individuals in the world's fastest growing economy.
Lastly, this 'speculative' buy has the potential to supercharge your portfolio's returns, this year and next. Liquefied Natural Gas Limited (ASX: LNG) is not only the name of the company but the commodity it sells. It is an international developer of mid-scale LNG projects. Its extremely promising Magnolia project is in the epicentre of the US energy sector in the Gulf of Mexico. Recent indications suggest the company could be on the brink of signing contracts for four-million tonnes per year of LNG and it is currently discussing additional increases in production. The contracts could pose big upside potential for this $100-million company.
Foolish takeaway
Now is the time to start looking at small-cap stocks currently undervalued and under-researched by the market. These companies could represent significant long-term value for investors willing to take on larger amounts of risk in their portfolios. Investors should determine their tolerance for losses before making a purchase of high risk/high reward small-cap companies.
