The small side of the Australian share market carries significantly more investment risk than other areas.
However, if your risk tolerance allows for it, having a bit of exposure to this side of the market could be a good thing for a balanced portfolio. This is due to the potential returns on offer if you can find a star of the future in its early days.
With that in mind, here are two small cap ASX shares that could be worth watching closely:
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Adore Beauty Group Limited (ASX: ABY)
The first small cap to watch is Australia's leading online beauty retailer.
Adore Beauty has been growing strongly over the last few years and continued this positive form in FY 2021. For the 12 months ended 30 June, the company reported a 48% increase in revenue to $179.3 million and a 53% jump in EBITDA to $7.6 million. This was driven by increased repeat sales and a 39% lift in active customers to 818,000.
Positively, the company still has a long runway for growth in the future. Management notes that the beauty and personal care (BPC) market in Australia is worth $11.2 billion and is expected to grow at a 26% CAGR through to 2024. Furthermore, online sales comprise just 11.4% of the BPC market at present but are expected to grow significantly as more sales shift online.
Earlier this month the team at Morgan Stanley put an overweight rating and $6.00 price target on the company's shares.
Clarity Pharmaceuticals Ltd (ASX: CU6)
Another small cap ASX share to look at is Clarity Pharmaceuticals. It is a newly listed clinical stage radiopharmaceutical company. Clarity specialising in targeted copper theranostics, for the diagnosis and treatment of cancers.
The team at Bell Potter note that this type of molecular targeted radiation offers significant advantages to traditional oncology tools. These include radiotherapy, chemotherapy, and has synergistic impacts with hormone therapy, and immunotherapies.
It also notes that Clarity's unique platform is based on copper radionuclides. It feels this may offer advantages compared to other frequently used radionuclides.
The broker currently has a speculative buy rating and $1.77 price target on its shares. Though, Bell Potter believes a fully de-risked pipeline would make its shares worth $3.75.
