Diversification is an important tool every investor should use to minimise risk by avoiding being overly exposed to one particular investment.
This is especially the case for individuals who don't have the luxury of time to help their assets recover from a fall in value.
While many SMSF investors understandably stick to the big end of town when it comes to shares, some of the most rewarding investments come from those companies that have a market capitalisation of less than $1 billion. These are the fast growing, high risk companies that can really help you to beat the market's average.
I'm not advocating investing the majority of your capital in these stocks – far from it – but I think a small percentage of your portfolio (5-15%) is a worthwhile allocation for an SMSF investor to achieve some additional diversification.
So here are three stocks that might just help your SMSF beat the market's average:
1. Capitol Health Ltd (ASX: CAJ) – Market Cap: $306 million – I've previously written about Capitol Health and the long term potential it has to grow earnings through acquisitions and geographic expansion. The company also has a number of industry tailwinds that should see the demand for diagnostic imaging increase over the next decade or so and this should drive earnings continually higher. The shares are trading at around 22x FY15 earnings and while this is a premium to the broader market, Capitol Health is expected to grow its earnings at double-digit rates over the next few years. The shares have pulled back recently but the underlying fundamentals of the business have not changed – a sign that this may be a reasonable buying opportunity.
2. Retail Food Group Limited (ASX: RFG) – Market Cap: $688 million – Six months ago the shares of Retail Food Group were changing hands near $8 but you can now pick up the same company closer to $4 per share. Investors have hammered the stock on the back of concerns about the slowing of the economy and the impact this will have on its coffee and fast food sales. While it is too early to say if these fears will materialise, the company recently forecast earnings growth of 20% for the year ahead. If the company can deliver on this forecast, then Retail Food Group's share price will be drastically higher than it is today. Investors shouldn't dismiss Retail Food Group's international expansion plans either, with the company expected to more than triple the number of new international outlet commissionings over the next three years. It is currently trading on a price-to-earnings (P/E) ratio of just 11.5 and investors can pick up a fully franked dividend yield of more than 6%.
3. Collins Foods Ltd (ASX: CKF) – Market Cap: $300 million – Many investors might not be aware of Collins Foods as an investment but its flagship brand, KFC Restuarants, certainly is well known. The company operates 171 KFC stores throughout Australia as well as 26 Sizzler restaurants in Australia and Asia. The company has been investing heavily over recent years to build new stores, create new products and improve marketing to consumers. This strategy looks to be paying off and since 2012, the share price has increased by more than 200%. Collins Foods' most recent underlying financial results were impressive, with net profit after tax and earnings per share increasing by more than 37%. The company is also trialling new concepts, such as Snag Stand, but the KFC operations are expected to maintain earnings momentum into FY16 and provide the earnings growth required for further expansion. Even with the rapid rise in the share price over the past three years, the shares are currently trading on a P/E ratio of 12 and this looks like reasonable value if earnings growth can continue. Investors will also benefit from a fully franked dividend yield of 3.5%.
Looking for two more small caps to sink your teeth into?
