3 exciting small caps to watch in April

Pro Medicus Ltd (ASX:PME) and Alteryx Inc. (AYX) are two hot looking businesses.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When you build an investment of portfolio of say 10 to 20 shares the majority of your holdings should be high-quality larger companies with blue-chip qualities, strong track records of profit growth, and superb outlooks supported by robust competitive positions.

However, for more experienced investors it's worth taking a look at the small-cap end of the market as it's companies with market values lower than $2 billion that have the most opportunity to produce eye-watering returns.

After all a company can go a lot faster from a $500 million company to a $5 billion company, than from a $50 billion company to a $500 billion company.

This is due to the law of large numbers and because the market values larger companies more conservatively. In other words they are unlikely to get the large valuation or profit multiple re-rating that can turbo charge a small-cap share price when delivered in conjunction with strong profit growth.

Take the US$900 billion tech giant Apple Inc. that trades on around 14x trailing earnings despite being arguably the world's best company.

While a small-cap exhibiting signs of accelerating growth can easily have an earnings multiple up to 100x (despite having nowhere near the quality of Apple Inc) if investors believe it can double profits for a number of years in a row.

So here are three small businesses you should know about.

Pro Medicus Ltd (ASX: PME) is a software-as-a-service medical imaging business I've covered a lot over the last 4 years. It's a founder-led market leader in lucrative global healthcare markets that is executing well, profitable, and boasts a strong track record of growth.

In fact it ticks all the boxes except perhaps valuation, therefore I'd rate it a hold for now. However, much cheaper, and it's a buy.

Bigtincan Holdings Ltd (ASX: BTH) only has a $119 million market valuation, but is a software business that has partnerships with Adobe and Salesforce as the kings of online CRM systems. Bigtincan just entered a trading half to raise around $16 million to give it the balance sheet firepower to continue its organic growth push. It's high risk, but could produce big returns.

Alteryx Inc. (AYX) is a founder-led NASDAQ listed U.S. data analytics company that is forecasting a profit in 2019 and is growing like nuts. I'm flagging it because it has a significant presence in Australia with customers like Commonwealth Bank of Australia (ASX: CBA), Telstra (ASX: TLS), the NBN Company and Australia Post.

It also has a blue-chip client list in the U.S. subscribing to its data-crunching platforms, which suggests its tech provides a moat or competitive advantage that bodes well for the future. The stock has run hot, but I'd rate this US$5 billion business a buy today.

Tom Richardson owns shares of Alteryx, Apple and Pro Medicus Ltd. You can find Tom on Twitter @tommyr345 The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of BIGTINCAN FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended BIGTINCAN FPO and Pro Medicus Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A woman's hand draws a stylised 'Top Ten' on a projected surface.
Share Gainers

Here are the top 10 ASX 200 shares today

It was another tough day for investors this Tuesday.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why HMC Capital, Platinum, Sigma, and Skycity shares are dropping today

These shares are having a tough session on Tuesday. But why?

Read more »

A close-up photo of a ballot box with an Australian flag in front of it and a gentleman's hands placing his vote in the 2022 election inside the box
Share Market News

How these ASX 200 stocks are primed to gain from Labor's resounding Federal election win

With the Federal election in the rear-view, which ASX 200 stocks should I buy now?

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.
Share Gainers

Why Dimerix, Evolution Mining, Inghams, and NextDC shares are charging higher today

These shares are rising when many are falling today. But why?

Read more »

Smiling young woman eating chocolate outdoors.
Share Market News

The See's Candies playbook for ASX investors

Two ASX businesses that remind me of Buffett’s sweetest investment.

Read more »

Man smiling at a laptop because of a rising share price.
Opinions

My 2 favourite ASX sectors to invest in

Finding your groove can help your investing success.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway Warren Buffett
Opinions

3 things I learned from Warren Buffett being the CEO of Berkshire Hathaway

The Oracle from Omaha is in his last year as CEO.

Read more »

A male ASX 200 broker wearing a blue shirt and black tie holds one hand to his chin with the other arm crossed across his body as he watches stock prices on a digital screen while deep in thought
Share Market News

5 things to watch on the ASX 200 on Tuesday

Here's what to expect on the local market today.

Read more »