I'm always on the lookout for small cap growth shares for my portfolio that could beat the market.
Typically it seems to be tech shares that are the best type of business which can outperform the market due to how quickly they can distribute their products and how high the gross profit margin is – which helps gross profit and hopefully the net profit grow quite quickly.
Here are three high-risk, potentially high-reward shares I'd pick:
LiveTiles Ltd (ASX: LVT)
LiveTiles provides workplace tools via a platform for Microsoft products Office 365, Azure and SharePoint. LiveTiles utilises analytics and productivity bot assistants to get the best out of client's people and helps them automate some tasks. This type of service is valuable for people wanting to save money and improve efficiencies.
The small cap is gaining rapid traction with businesses, universities and so in Australia, Europe and North America. It helps that LiveTiles is now presenting at some of Microsoft's workplace events to spread the word.
LiveTiles keeps growing strongly, revenue grew by 218% to $18 million in FY19.
The LiveTiles share price is down 30% over the past two months, so I think this could be a good time to buy shares of this rapidly-growing business.
Redbubble Ltd (ASX: RBL)
Redbubble is the owner of a global marketplace for printed products and other types of artist-made items.
It's this type of setup which many investors think can benefit from 'network effects'. Customers and sellers both see Redbubble as good place to transact and keep returning, which also attracts other artists and customers, creating a good positive loop. Being an online business means that the virtual infrastructure is already there, and new revenue hopefully just falls to the profit lines like a waterfall.
In FY19 Redbubble generated marketplace revenue growth of 41% to $257 million and gross profit growth of 48% to $95 million. It also achieved an operating earnings before interest, tax, depreciation and amortisation (EBITDA) profit of $3.8 million, the first since the IPO.
Its share price is down 15% over the past year despite the continuing growth and the lower interest rate.
Citadel Group Ltd (ASX: CGL)
Citadel has seen its share price drop by 50% over the past year with revenue and profit going backwards due to project delays and lower customer spending in the fourth quarter in the government business.
I think that with the federal election out of the way we could see FY20 be a resurgent year for the tech business. IT spending should continue to rise over the long-term in the health, defence and education areas with organisations always wanting to be more secure and more efficient.
Roll-up strategies aren't that compelling, but I like the bolt-ons that Citadel has made, such as Gruden, which expands the offering it can make to its clients like governments.
It's trading at only 12x FY21's estimated earnings.
Foolish takeaway
Assuming profitability returns to normal in FY20 then Citadel could be the best one to buy for the next couple of years, particularly if it starts expanding internationally. But LiveTiles could be the one to generate the biggest returns if it continues on this growth rate for at least a couple more years.
