If your risk tolerance allows for it, having a little exposure to the small side of the market could be worth considering.
This is because if you can identify a future mid or large cap share while it is still in its infancy, you could potentially generate outsized returns in the future.
With that in mind, I have picked out two small cap ASX shares that brokers rate highly. They are as follows:
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Adore Beauty Group Limited (ASX: ABY)
Adore Beauty is a growing online beauty retailer. It was founded in a Melbourne garage by Kate Morris and James Height back in 2000.
Since then, it has evolved into an integrated content, marketing, and ecommerce retail platform in order to better meet customer needs.
At the end of FY 2021, the company had 818,000 active customers. This was up 38% over the 12 months. Together with a 7% increase in its average revenue per customer, this led to Adore Beauty reporting a 48% jump in revenue to $179.3 million.
The good news is that this is still only a very small slice of the Australian beauty and personal market worth an estimated ~$11 billion a year. This gives Adore Beauty a very long runway for growth, particularly given the low penetration of online beauty sales compared to other Western markets.
Morgan Stanley is positive on the company's long term outlook. So much so, it has an overweight rating and $6.00 price target on Adore Beauty's shares.
Serko Ltd (ASX: SKO)
Another small cap to look at is Serko. It is an online travel booking and expense management provider. While times have been hard because of the pandemic, demand is starting to pick up and is likely to continue doing so as the vaccine rollout gathers pace and borders reopen.
Another big positive is the game-changing Booking.com deal, which has seen the launch of the new Zeno powered 'Booking.com for Business' platform. In August the company had migrated over 150,000 activated existing businesses onto the new platform, with more to follow.
This comes at a time when Serko notes industry trends are turning favourable because of the pandemic. It advised that risk and cost management will be the key priorities for organisations as they return to travel. As its Zeno product has a number of product capabilities to address the challenges of post-pandemic business travel, it expects to benefit.
Macquarie is positive on Serko. It currently has an outperform rating and NZ$8.31 (A$7.92) price target on its shares.
