Many investors have the "occasional punt" on small or micro-cap stocks with significant upside potential. Sometimes these can prove to be fantastic investments but most of the time they'll turn out to be a flop.
As Australian investors, we've got a never-ending supply of small-cap stocks which we can take a punt on. Generally, a vast majority come from the resources sector where many would-be miners are trying to find capital to fund exploration or develop projects.
However, if we can identify those companies which can bridge the gap between what they are and what they want to become, the rewards can be spectacular. Here are three high-risk small-cap stocks I'd consider taking a punt on.
1. Australian Bauxite Ltd (ASX: ABX) is a bauxite explorer and, potentially, a low cost producer with operations dotted across Australia's eastern seaboard. The company recently completed a trial mining period at its Tasmanian operations. With Indonesia's ban, bauxite prices are tipped to remain well above the estimated costs of production at the Tasmanian and Goulburn South operations.
2. Strike Energy Ltd (ASX: STX) is a $92 million oil and gas exploration company with good assets in both the US and South Australia's Cooper Basin. With a booming oil and gas industry in the US, Strike's assets are well placed to benefit from increased activity in the sector. However, closer to home, Strike's assets in the Cooper Basin provide significant room for value accretion. With joint venture partnerships, close proximity to key infrastructure and increased demand for LNG from Australia's east coast, the company appears worthy of your consideration.
3. Global Health Limited (ASX: GLH) provides innovative software development for Australia's healthcare sector. Whilst the company has a market capitalisation of just $18 million, it's already very profitable and less risky than both ABX and Strike. Recently the company released an update on its full-year financial performance and expects to report revenues of $5.25 million and net profit after tax of $1.44 million for FY14. Despite ongoing growth, the market ascribes a very low valuation to its shares.
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Whilst it can be exciting to take a punt on a stock, the sharemarket is no place for gambling all your money away. Before buying into any of these three companies, careful research is a must and investors should ensure they maintain a well diversified portfolio. In my opinion all of these companies hold significant long-term upside potential but unlocking said potential will be the most difficult part of their journey. That's why I believe investors must maintain a diversified portfolio and shouldn't spend what they cannot afford to lose. It's important to remember, none of them pay a dividend.
