Small-cap stocks on the ASX are listed companies that sit outside the ASX 100 and have a market capitalisation between $100 million and $2 billion. These stocks usually get a bad rap because most of them produce negative average returns. However, lower interest rates and an improving economic outlook for Australia could turn that around.
For the 12 months to date, the S&P/ASX Small Ordinaries Index returned 22.17%, whilst the S&P/ASX 100 returned 24.66% for the same period. This could be an indicator that small-cap stocks on the ASX are getting ready to launch.
In choosing to invest in small-caps, investors should look for companies that share certain characteristics. These companies firstly need to be in a growing sector, be exposed to structural tailwinds and lastly have innovative products to exploit market opportunities.
Here are 3 ASX small-cap shares that could help you beat the market in 2020.
EML Payments Ltd (ASX: EML)
EML Payments is an Australian fintech company that provides the technology solutions for pay-outs, gifts, rewards and supplier payments. The company has a large presence in Australia, North America and Europe, issuing mobile, virtual and physical card solutions.
The EML share price more than tripled in 2019, fuelled by strong earnings and several successful acquisitions. For FY19, EML reported a 283% growth in net profit after tax of $8.45 million and a 37% increase in revenue of $97.2 million. The company also completed the acquisition and integration of PerfectCard DAC and Flex-e-Card which contributed 32% to EML's earnings before interest, tax, depreciation and amortisation.
EML has a scalable business model and additional capital will allow the company to increase acquisitions and maintain a strong growth trajectory.
PointsBet Holdings Ltd (ASX: PBH)
Pointsbet provides online sports and racing betting services via its cloud-based platform and the company's share price absolutely surged in 2019. Pointsbet listed on the ASX in June last year at $2.00 and is currently trading near all-time highs around $5.40.
In addition to the Australian market, Pointsbet is also targeting expansion into the US. The US Supreme Court recently overturned legislation that banned sports betting in the US, providing an opportunity for platforms like PointsBet. The commercialisation of legal online sports betting in the US provides Pointsbet with a runway of opportunity in 2020.
Audinate Group Ltd (ASX: AD8)
The Audinate share price more than doubled in 2019 and could have further to go in 2020. Despite the company's share price surging, some analysts think that investors are still underestimating the complexity of the problem Audinate is addressing.
Audinate provides hardware and software solutions to the audio-visual (AV) market. The company's flagship and award-winning Dante program is a global leader in AV connectivity, eliminating the need for traditional analogue connections by transmitting synchronised audio signals across large distances via IP networks.
The platform is used extensively across the professional live sound, commercial installation, broadcast, public address, and recording industries globally. In addition to partnerships and a pipeline of more products, Audinate also looks to expand its sales and support team and accelerate market penetration in 2020.
Foolish takeaway
In my experience, investing in small-cap stocks requires investors to do their due diligence and have a set of criteria when analysing a company. I think a good strategy would be to compile a watchlist of small-cap stocks and wait for positive price action before making an investment decision.
