ASX small caps could outperform their large blue chip counterparts because of how much long-term growth potential they have.
But you've got to be careful about the growth shares you pick, there are some real bad ones in there as well.
Here are five exciting ASX small cap ideas I'd buy:
Kogan.Com Ltd (ASX: KGN)
The online business now has a number of different services including retail, mobile, NBN internet, energy, travel services, credit cards, home loans, super, various insurances, cars and Kogan membership.
It's one of those scalable business models that can allow shareholders to benefit from growing profit much faster than revenue growth because costs don't go up at the same speed. Kogan doesn't carry the risk for the complex products like insurance and super – it's the partner that takes on the ins and outs.
If Kogan can sell more services to more customers it can create good network effects which is already playing out.
Redbubble Ltd (ASX: RBL)
This company operates marketplace businesses TeePublic and Redbubble. It's finding more genuine artists and more customers wanting to use the websites. It's a strong cycle that can lead to the most sellers and potential buyers using the site in a self-fulfilling loop.
Redbubble has now reached a point where it's generating a decent operating profit and good free cash flow. If this continues for the rest of the year and into FY21 then it could become of the ASX's leading technology shares as more revenue drops to the net profit line.
It offers quite a different service to typical online retailers like Amazon or Kogan, which should mean less major competition.
Duxton Water Ltd (ASX: D2O)
Duxton Water is the only company on the ASX that is a pure play on owning water entitlements.
Australia is experiencing very dry conditions at the moment, which is leading to water prices rising. In a wet year I'd expect some of the gains to reverse.
I think Duxton Water is a good way to get indirect access to the Australian agriculture industry without taking on the operational risk. But, there is a small chance of government intervention to help farmers who are suffering.
It's trading at a decent discount to the underlying net asset value per share.
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is a tech business that helps various organisations receive electronic donations. At the moment Pushpay's main clients are the large churches in the US. This target market generates good recurring revenue for Pushpay.
In the future we may soon Pushpay win other clients from sectors like not for profit charities. Pushpay has reached operating profitability and a cashflow breakeven point, so profit could grow faster than revenue from here.
WAM Microcap Limited (ASX: WMI)
If you want to invest in small caps but you're not sure which small caps to invest in then you could choose an investment manager who specialises in that role like the listed investment company (LIC) WAM Microcap.
It has soundly outperformed the general ASX returns and is also paying a good growing dividend so that the fund size doesn't become too large.
Foolish takeaway
Each of these shares could be sound market-beaters in my opinion. All of them are generating profit, they're not some early-stage risky ideas. At today's prices I would choose Pushpay, Redbubble and WAM Microcap.
