If you believe small-cap companies outperform larger companies, it may be worth putting Praemium Ltd (ASX: PPS), Gentrack Group Ltd (ASX: GTK) and Nearmap Ltd (ASX: NEA) shares on your watchlist today.
Are small caps better?
Using a mathematical technique known as 'regression', academics have shown that small companies perform slightly better than larger companies. It is one of the four 'factors' identified by Fama and French (1993), along with low valuations as measured by a company's price-to-book ratio.
However, beyond the academic theory, I think there are more reasons why investors should focus on smaller companies, including:
- Fewer analysts follow small companies, so you may find a 'hidden gem'
- Australia is a small market, so our blue chip companies struggle to grow compared to smaller companies
- Generally, smaller companies are more nimble, innovative and agile
Of course, small caps can also be risky. That comes with the terrain.
3 small cap share ideas
Praemium is a $175 million financial services and technology business from Melbourne. The company has created a platform that enables investors and financial advisers to create investment portfolios. It is a growing market because it has a number of benefits for financial advisers and their clients.
Gentrack Group is a Kiwi software company which develops programs for airports and utilities, like water and energy companies. It is currently expanding abroad into the UK and has recently made a number of acquisitions to leverage growth. Despite its modest long-term growth potential, Gentrack also has a number of defensive qualities, like a 2.4% dividend yield.
Nearmap is a company that has developed sophisticated mapping technology. Its maps are so clear that insurers can use it to quote households for solar panels. Its maps are so frequently updated that governments can use it to monitor houses to see which of us have done renovations or have a pool in their backyard. The $290 million company has been expanding abroad and is beginning to gain traction.
