Small caps have a good chance of producing the biggest returns for ASX investors. It's much easier to double a business in size from $200 million to $400 million compared to growing from $2 billion to $4 billion.
That's why I've got my eyes in these 10 exciting ASX small cap shares for 2020 and beyond:
Redbubble Ltd (ASX: RBL)
What it is: It's an online marketplace that that sells artist-produced items like wall art and clothing.
Why I think it could do well in 2020 and beyond: Redbubble has recently gotten to profit and cashflow breakeven status. Yet, its growing gross profit margins should mean even more revenue turning to profit for the company and shareholders. It can benefit from the same type of network effects as Amazon and others – becoming more popular attracts more buyers and sellers, with new revenue falling to the bottom line because the digital infrastructure has already been built.
Citadel Group Ltd (ASX: CGL)
What it is: It's a tech business which looks to provide essential software for organisations to carry out their work in sectors such as government defence and education.
Why I think it could do well in 2020 and beyond: The share price has been smashed by around 50% over the past year, but I think the worst could be over when taking a 18 to 24 month view. The company keeps adding new offerings to its services and is also talking about overseas expansion. This could be a decent turnaround story in the 2020s.
Pushpay Holdings Ltd (ASX: PPH)
What it is: It's a charity donation payment business. Currently, its largest clients are US churches.
Why I think it could do well in 2020 and beyond: The company has recently reached cashflow and profitability breakeven, so a lot of new revenue will fall to the bottom line as it adds more churches and givers to its donation system. It's a powerful network and generates very useful regular annual revenue from the people donating.
Bubs Australia Ltd (ASX: BUB)
What it is: It's an infant formula company that initially started with just goat milk products, but now it has a variety of products.
Why I think it could do well in 2020 and beyond: The company has made a number of quality decisions over the past year including making partnerships with large retailers here and in China, as well as taking stakes in its supply chain. Its new products, including organic grass fed cow milk formula, could help it become a much larger company in the next few years.
City Chic Collective Ltd (ASX: CCX)
What it is: It's a retailer of plus-size clothing for women.
Why I think it could do well in 2020 and beyond: The company is generating a lot of organic growth. Its stores are doing well in Australia, a high proportion of its sales are through online channels and it has an attractive international segment that's growing well.
National Veterinary Care Ltd (ASX: NVL)
What it is: As the name might suggest, it's a veterinary clinic business with locations across Australia and New Zealand.
Why I think it could do well in 2020 and beyond: The company has acquired a lot of clinics over the past year or two, so management are working on increasing profit margins and also growing existing clinic revenue with a pet membership program. The fast-growing revenue and higher margins could mean fast profit growth and a higher share price.
WAM Microcap Limited (ASX: WMI)
What it is: It's a listed investment company (LIC) which holds quite a large portfolio of small caps (market caps under $300 million) that the investment team have identified as undervalued growth opportunities.
Why I think it could do well in 2020 and beyond: Its portfolio has performed very strongly during 2019 and indeed since inception. It can be hard to find the small cap opportunities yourself, so I'm happy for some investing to be done by a high-quality team. The special dividends and the growing ordinary dividend is a very useful bonus.
Japara Healthcare Ltd (ASX: JHC)
What it is: Japara is one of the largest aged care providers in Australia.
Why I think it could do well in 2020 and beyond: The sector has gone through a really rough time over the past year or two. But, the long-term ageing population tailwinds remain and the aged care royal commission could cause many smaller players drop out of the industry, which could be acquisition opportunities for larger players like Japara.
Duxton Water Ltd (ASX: D2O)
What it is: Duxton Water owns water entitlements and leases them out to agriculture businesses.
Why I think it could do well in 2020 and beyond: Water entitlement values have gone up a lot during 2018 and 2019 which has benefited Duxton Water's net asset value (NAV) a lot. However, the share price hasn't gone up as much. It's at a 19% discount to its after-tax NAV and a 29% discount to the pre-tax NAV. It's a great discount and the NAV could go even higher in 2020, but rainy years will likely mean a drop in water prices. Duxton Water is aiming to steadily grow its dividend.
Naos Emerging Opportunities Company Ltd (ASX: NCC)
What it is: It's another LIC that invests in small caps. Naos looks at shares with market capitalisations under $250 million.
Why I think it could do well in 2020 and beyond: Naos maintains a high-conviction portfolio of around 10 shares which it holds for the long-term. The LIC pays a very high dividend, it has a grossed-up dividend yield of 10.5%.
Foolish takeaway
I think Pushpay and Redbubble have the best chance of producing the strongest returns over the next few years, but WAM Microcap could be a safer choice because of its diversified portfolio and its ability to invest into different businesses as it sees fit.
