The small cap world is definitely the most exciting part of the share market. It's a chance to find the next blue chips or mid-caps before they're on most people's radars.
It's easier to outperform with small caps than larger businesses because it's a lot easier to double a small business from $200 million to $400 million than it is to double a large business from $20 billion to $40 billion.
Warren Buffett has said himself that his returns would be better these days if he was investing with smaller amounts of capital, allowing him to work with smaller shares.
With that in mind, here's how I'd invest $10,000 into small caps if I had the money:
Paragon Care Ltd (ASX: PGC) – $3,500
I believe Paragon is one of the best small cap medium-term opportunities on the market, which is why I mention it so much. It's a small cap healthcare provider that supplies a variety of healthcare devices, equipment and beds to healthcare facilities like hospitals and aged care homes.
The total amount spent on healthcare expenditure increases every year and this should benefit Paragon over time. It is steadily acquiring other healthcare providers to improve its size and economies of scale.
It's trading at around 10x FY19's estimated earnings due to all of the new acquisitions.
National Veterinary Care Ltd (ASX: NVL) – $2,500
This veterinary operator has steadily acquired vet clinics so that it now has 66 – it started with one only a few years ago.
I believe that the market is underestimating its potential considering how much additional annualised revenue and profit that the business has acquired over the past year.
It seems to have a good chance of continued growth particularly because it recently updated the market to say organic revenue had grown by 3% during the year, meaning it's outperforming its competitor in the standalone vet space. National Vet Care is using its pet membership and management services segments to good effect to grow profit.
It's trading at around 24x FY18's estimated earnings.
Propel Funeral Partners Ltd (ASX: PFP) – $1,500
Propel is a fairly newly-listed funeral business that is also looking to use an acquisition strategy to grow its market share of the funeral industry.
Although funerals isn't a fast-growth sector like software, death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. This could provide a pleasing tailwind for Propel for decades to come.
It's trading at around 24x FY18's estimated earnings.
WAM Microcap Limited (ASX: WMI) – $2,500
If you like the idea of small caps but don't want to invest much of your money into one particular small cap because you think it's too risky then it could be an idea to choose a manager who specialises in that area.
WAM Microcap looks for targets with a market capitalisation of less than $300 million at the time of acquisition. It only listed a year ago but its portfolio has already created a return of 28.4% before fees. It won't be this strong every year, but it's a great start.
Foolish takeaway
I believe all four could create market-beating returns over the next decade, that's why I am invested in all four. If I could only choose one for the next two years then it would be Paragon, it looks cheap to me and boasts a nice yield.
