Many investors associate small-cap stocks with high risk and elevated levels of volatility. While that is certainly true for some of these stocks, those investors are also ignoring the enormous upside potential possessed by some of Australia's smaller public companies.
Size does matter
For a company like Commonwealth Bank of Australia (ASX: CBA), no one could reasonably expect the company to double, or triple in size over the next year (or five). With a market value of $120 billion and approximately $45.3 billion in revenue during the 2015 financial year, it's simply too big to achieve such growth (rationally speaking, at least).
For companies at the smaller end of the market however, such growth is possible. Sometimes, all it takes is a hot new product or an attractive new licensing agreement for the business to take off which can result in enormous share price gains.
With the Australian sharemarket hovering near a two-year low, now could be a great time to start building positions in some of the country's most promising small-cap stocks. Here are seven worth considering.
1) Nearmap Ltd (ASX: NEA)
Nearmap provides geospatial mapping technology which is proving incredibly useful across a range of industries. Its Australian business has taken off and it is currently rolling out its operations in the much larger market of the United States. The shares have fallen to just 44 cents – down from 83.5 cents – giving investors a great opportunity to get started.
2) Catapult Group International Ltd (ASX: CAT)
Catapult Group provides the software and hardware used to track the performances of athletes around the world. Catapult's products are used in cricket, rugby and the English Premier League (to name just a few sporting codes), with sales growing strongly. This could become a very attractive industry in the coming years as athletes become increasingly scientific in their approach to game day.
3) Senetas Corporation Limited (ASX: SEN)
With the ever-growing risk of hacking scandals, data theft and even cyber terrorism, it is clear that data protection is an absolute must. Senetas provides a high-speed data encryption hardware to business and government customers with the aim to protect data between sites, rather than when it is simply at rest. The shares have fallen almost 39% in a matter of months, and could be a good option for investors.
4) Freelancer Ltd (ASX: FLN)
Small businesses around the world are making use of freelancer.com to get work done. Essentially, employers can go to the site to hire freelancers to complete various tasks, such as software development and website design, and this could become a very powerful tool in the years to come. The crowdsourcing marketplace business has recorded phenomenal growth in regards to total users, and total projects posted on the site which could speak volumes for the future.
5) Collection House Limited (ASX: CLH)
Collection House is one of Australia's leading receivable management groups. Operating out of two segments, Collection House strives to collect debts on behalf of various clients, while it also purchases debt – sometimes for as little as a few cents on the dollar – and profits on the successful collections it makes. Despite forecasts of reasonable growth – and a generous fully franked dividend yield – Collection House's shares are still trading at just $2.32 on a trailing price-earnings ratio of 13.6x.
6) Somnomed Limited (ASX: SOM)
SomnoMed develops and manufactures SomnoDent – a mouthguard-like device used to treat sleep apnea. Although some medical practitioners mightn't find the product to be as effective as those offered by rivals ResMed Inc. or Fisher & Paykel Healthcare, they are considerably cheaper and less intrusive. Better yet, some of SomnoMed's devices even include a microchip to record compliance data, which may increase the likelihood of practitioners using them.
7) 1-Page Ltd (ASX: 1PG)
The market's enthusiasm for 1-Page is hardly a secret. The shares have risen 1,370% since October 2014 as investors become increasingly excited about the company's long-term potential. At $4.70 a share, 1-Page is by no means a bargain but could be a decent bet for investors with a very long-term focus. Indeed, 1-Page's vision to revolutionise the way companies around the world hire new talent could see it go on to rival SEEK Limited (ASX: SEK) one day.
