On Saturday, the Fairfax Press revealed that after 18 months of underperformance compared to the S&P/ASX 200 Index (ASX: XJO), Australian blue chip stocks have finally outperformed the broader index since October after Donald Trump's election victory.
Although the demise of once high-flying-growth stocks Bellamy's Australia Ltd (ASX: BAL) and Vocus Communications Limited (ASX: VOC) hasn't helped the broader index's cause, leading investment bank Macquarie Group Ltd (ASX: MQG) attributes the outperformance amongst the S&P/ASX 20 Index (ASX: XTL) to a strong rebound in miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), and rotation into inflation sensitive companies like insurer QBE Insurance Group Ltd (ASX: QBE).
Whilst Macquarie is optimistic that this outperformance can continue into 2017, I believe investors looking for blockbuster returns need to venture outside the ASX 200 and turn to small caps.
Afterpay Holdings Ltd (ASX: AFY) and Mobile Embrace Ltd (ASX: MBE) are two small stocks which are on my radar.
Afterpay
Afterpay is arguably the ASX's most promising fintech stock, doubling from its list price of $1.30 in just over six months. The company operates in the lucrative payments industry, offering users the chance to purchase items in-store or online and pay for them later in four equal fortnightly instalments.
Since listing in May, Afterpay has continued its staggering growth by signing more and more retail merchants. As at 31 September 2016, Afterpay had increased its retail merchant base by 166% on prior year, and based on its latest addition — listed retail conglomerate Super Retail Group Ltd (ASX: SUL) early last week – it's showing no signs of slowing.
This makes Afterpay definitely one to watch.
Mobile Embrace
Keeping with the payment disruptor theme, Mobile Embrace is another hot fintech stock which operates in the mobile advertising and payments space. Coming off a strong 2016 financial year, Mobile Embrace's shares fell off a cliff after management revealed changes to Australia's telco carrier billings will affect the company's ability to acquire new advertising customers.
Though the changes will have a significant impact on earnings, Mobile Embrace still expects full year earnings to be in excess of $8 million, down from $9.5 million in 2016. Whilst this is a negative for shareholders, I believe the current price of its shares undervalue the company's international network and scalability.
Therefore, I think the company is worth a second look at current prices.
Foolish takeaway
Both Afterpay and Mobile Embrace are speculative stocks which offer the potential for 10-fold gains, but carry substantial risk. Investors looking to earn stable returns should stick to blue-chip stalwarts which demonstrate resilience in all economic cycles.
However, those with more appetite for risk should add Afterpay and Mobile Embrace to their watch list.
