When it comes to an early retirement, some investors might think that trying to strike it rich with a speculative mining or biotechnology company is the way to go.
While there is a very small chance that this could happen, history shows that the odds are stacked heavily against this strategy.
Instead, I think a better option is to look for small cap companies that are actually generating revenue and making profits with a clear path for future growth.
Two small caps that meet this criteria and look to have bright prospects ahead of them include:
Vitaco Holdings Ltd (ASX: VIT)
Following an impressive debut back in September 2015, Vitaco shares have seriously underperformed mainly as a result of unrealistic market expectations. Many investors were unfairly comparing the vitamin and nutrition company to Blackmores Limited (ASX: BKL) when it was never going to produce the sort of explosive growth that Blackmores was achieving.
Instead, I think Vitaco should be viewed as a company that will have the potential to gradually increase and maintain earnings year after year.
The New Zealand-based company operates in a number of health related segments including leading positions in sports nutrition and health foods. The company has a number of market-leading products in Australia and New Zealand and is now developing a platform to expand into China where it can take advantage of its 'green and clean' reputation.
The shares are currently trading on a forecast price-to-earnings (P/E) ratio of around 18.5x which doesn't appear to be overly expensive on the basis it can begin to make progress on its Asian expansion plans.
Gateway Lifestyle Group (ASX: GTY)
Gateway Lifestyle is a provider of affordable retirement living solutions with a relatively unique operating model.
Unlike other retirement community operators that require the resident to purchase a home and land package, Gateway Lifestyle only requires the resident to purchase the house.
Gateway Lifestyle retains ownership of the land and makes a profit from the sale of the home and also receives a recurring rental stream (that increases annually) from the resident in return.
This model is becoming increasingly popular amongst retirees as it obviously increases affordability without compromising on the quality of their living experience.
The company has a large pipeline of new developments that are located in the most popular regions for retirees and this guarantees demand will be high.
Gateway Lifestyle expects to exceed its FY16 prospectus forecast and to deliver underlying earnings per share of 17.2 cents. This means the shares are currently trading on a P/E ratio of around 16.5 – a reasonable valuation for a company that is expected to benefit greatly from a large proportion of Australia's ageing population that will be looking for affordable retirement living solutions in the future.
