If I had $3,000 to invest in three small cap ASX shares I'd be happy to buy the three ideas in this article.
Many of my previous top small cap ideas have grown so much they're no longer small caps. Citadel Group Ltd (ASX: CGL) is being taken over whilst Redbubble Ltd (ASX: RBL) is now worth over $1 billion. There's no official definition of a small cap, but I think a $1 billion market capitalisation is a good milestone. So I need to choose other ideas that still count as small caps.
These three small caps look compelling to me:
City Chic Collective Ltd (ASX: CCX)
This business is a retailer of plus-size women's clothing, accessories and footwear. The City Chic share price has fallen around 10% over the past month after it was announced that the ASX share wasn't successful with its bid for Catherines, a US retailer.
It's disappointing that City Chic didn't win the auction. However, I think it's a good sign that City Chic didn't bid too much because it shows respect for shareholder capital and management are focused on long-term returns.
Besides, City Chic is seeing opportunities to buy other brands in this current difficult retailing environment and it can also try to take make share. Its balance sheet is currently in a very strong position to be able to do this.
I'm quite bullish about the long-term prospects for the City Chic share price. It's growing nicely in Australia and it's expanding strongly in the northern hemisphere. It sells a high proportion of its goods online, which makes it well suited to the current COVID-19 era.
At the current City Chic share price it's trading at 23x FY22's estimated earnings.
NAOS Small Cap Opportunities Company Ltd (ASX: NSC)
This ASX share is a listed investment company (LIC) that hunts for companies with market caps between $100 million and $1 billion.
It's a high-conviction manager, it usually holds approximately 10 positions that it wants to be invested in for the long-term (generally for five years or longer). It has an industrial focus with no resources exposure or very early stage business exposure. It's ESG aware when it makes investment picks.
Some of its existing investment picks are small caps like MNF Group Ltd (ASX: MNF), Enero Group Ltd (ASX: EGG) and Over The Wire Holdings Ltd (ASX: OTW).
Aside from liking the existing investments, there are two other attractive elements about NAOS Small Cap Opportunities Company.
The NAOS Small Cap Opportunities Company share price is currently trading at a 17% discount to the pre-tax net tangible assets (NTA) of $0.71 at 31 August 2020. It also offers a grossed-up dividend yield of 9.7%.
Bubs Australia Ltd (ASX: BUB)
Bubs is a high-risk, high-reward ASX share small cap.
The Bubs share price has drifted 24% lower since 24 August, but the company's revenue and distribution continues to grow. I think this is an opportunistic time to buy part of a fast-growing business.
In FY20 alone it saw total revenue increase 32% to $62 million and infant formula sales jumped 58% to $30 million. Direct sales to China grew 32% and export markets outside of China saw a five fold increase of revenue.
COVID-19 has caused lumpy demand for the infant formula business' products, whilst restrictions are hampering the daigou channel. But I believe this is just a short-term issue for the small cap ASX share.
Over the longer-term I think Bubs is headed for cashflow positive status, positive earnings before interest, tax, depreciation and amortisation (EBITDA) as well as growing profit margins.
Bubs may not shoot the lights out every single quarter, but I believe the next two or three years will show continued progress on its international growth strategy. Vietnam and other non-China countries could become particularly pleasing markets for Bubs.
