You can't blame investors in the small-cap sector for being disappointed.
While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) – comprised of the nation's largest 200 companies by market capitalisation – has soared roughly 37% since mid-2012, the S&P/ASX Small Ords (Index: ^AXSO) (ASX: XSO) has barely risen 1% in that time (neither of these figures are including dividends).
Perhaps one of the reasons behind this trend is that investors are flocking towards the safer, more dependable options that offer attractive dividend yields at a time of low interest rates and high global volatility. Indeed, although there is potential for far greater gains from the smaller companies, there is less potential for heavy fluctuations in share price with the largest corporations.
However, this could soon change and those investors not exposed to the small-cap section of the market could prove to be the big losers after all. For instance, interest rates will inevitably rise, the market will soon realise that many of the companies at the higher end of the market have become overpriced and others will recognise the true earnings potential of these small-cap superstars. Here are three which you should consider adding today:
Greencross Limited (ASX: GXL):
The veterinary services provider that is rapidly expanding throughout Australia by acquiring more and more practices presents as a solid prospect. It has plans to open a further eight retail stores by the end of FY2014 which would take its total number of retail stores to 138, while it also grew revenue and profit by 24% and 159% in its half-year ending 31 December 2013. Investors will need to be cautious of the company's growing debt and ensure that any acquisitions made are in line with the company's overall strategy, but that shouldn't stop you from investing today.
Current Price – $7.69; Dividend Yield – 1.7% fully franked.
Yellow Brick Road Holdings Ltd (ASX: YBR):
The mortgage broker is still in its early days of growth and is set to record its maiden profit next year while the company's CEO has also hinted at the possibility of three acquisitions. Given the low interest rate environment, demand for Yellow Brick Road's services should remain strong as more and more customers seek mortgage advice. The company currently boasts a market capitalisation of just $118 million and is sitting 10.4% below its 52-week high of 67.5c a share.
Current Price – 60.5c; No dividend
Select Harvests Limited (ASX: SHV):
Following a dominant 2013, the almond producer's share price has dropped back to give investors an opportunity to stock up! California, which is the world's largest producing region, is currently enduring what is considered to be one of its worst droughts in history. This is applying an upwards pressure on the price of almonds which is beneficial for Select Harvests' margins. Growing profits, reduced costs and improved performance across the business should continue to drive shareholder returns – particularly given that its orchards are at a prime stage of growth.
Current Price – $6.44; Dividend Yield – 2.5% fully franked
Foolish takeaway
While small caps should make up a smaller portion of your portfolio (given their higher level of susceptibility to the market's mood swings) they are also highly necessary in that they can give you far greater returns than most blue-chip stocks ever could.
