Even though small-cap stocks tend to have much more risk and volatility involved than blue-chip shares, having some exposure to small caps and their potential upside can add strong upside potential for your portfolio.
A compliment of small-cap investments in a blue chip portfolio can be the shot needed to add that extra 5-10% in capital growth you probably won’t see in big players such as Commonwealth Bank, Wesfarmersand QBE.
The best small cap stocks to buy now are generally driven by three factors within the markets, understanding these forces helps us time the market and buy or sell small-cap stock at the most opportune moments.
The Three Main Drivers of Small Cap Stocks
In general, the markets and stocks are firstly driven on a short-term basis via supply and demand imbalances. This is the order flow on a day to day basis as investors buy or sell stock for different reasons. This order flow is generally hard to forecast and requires strong technical analysis and understanding of the underlying market to properly time.
Small cap stocks are particularly hard to forecast on a technical basis. This is because institutional investors tend to stay away from small-cap stocks due to investment mandates and general lack of liquidity. With the lack of institutional investors, small-cap stocks tend to be driven more by rumours and retail investors, which tend to be more emotionally invested in stocks than institutions who tend to trade on logic.
Secondly, markets and stocks are driven by macroeconomic forces in the medium-term. Factors include but are not limited to changes in interest rates, consumer sentiment, government policies and so forth. Understanding the nuances and how the different countries interact with each other in terms of trade and politics is key to understanding the forces that drive the markets as a whole.
Small caps tend not to be too highly influenced by macroeconomics and are less correlated to macroeconomic events. This is because small caps tend to be more qualitatively valued rather than quantitatively valued. In other words, small-cap stocks are valued on speculation as to the potential non-existent growth and earnings rather than what they are earning today. However, the macroeconomic environment is still vastly important – understanding what they are selling, who they are selling to and who their established competitors help us understand the potential growth the company has.
Finally, stocks in the long-term are driven by fundamentals. Factors include but are not limited to quantitative factors such as earnings growth, profit margin and return on equity. Qualitative factors include factors such as competition, operating environment, political and policy environment.
Fundamentals are highly important as we make assumptions and valuations based on the environment they will be operating in the future. In unstable or highly regulated environments, understanding the potential pitfalls is the difference between buying a small cap stock with potential and one that is doomed to fail.
To be able to pick the best small cap stocks to buy now, it is essential to combine market timing, macroeconomic and fundamental analytics.
Research Is Key To Finding The Best Small Cap Stocks To Buy Now
The hardest part about investing is the ability to process a large amount of information and factors to be able to navigate the macroeconomic and fundamental environment. Our Research team has been hard at work uncovering the best small cap stocks to buy now on the ASX on a macroeconomic and fundamental basis.
On a short-term, market timing basis, this is more tricky and is something that requires patience, skill and experience. Talk to one of our Advisers for more information about how to time entries.
I’ve outlined 5 stocks that we have found to either have good growth potential and a great story and these represent some of the best opportunities the ASX has to offer.
Zip (ASX Z1P) – Zip (ASX Z1P) is a digital point-of-sale & fast-growing payment solution, that operates in the buy-now-pay-later sector similar to Afterpay. Like AfterPay (ASX APT), Zip shares is leveraged to the fast-growing digitisation of the traditional lay-by offered by stores in days past, offering potentially phenomenal growth to early investors. Zip shares are a fantastic alternative if you are looking for another APT without paying the price APT is going for.
Pioneer Credit (ASX PNC) – Pioneer Credit Limited (ASX PNC) is a financial services provider, specialising in acquiring and servicing retail debt portfolios. The company has grown strongly in the past two years and there are no signs that this will slow. PNC has grown 90%+ year on year and outperformed the industry, we expect ASX PNC shares to have a bright future ahead.
Wattle Health (ASX WHA) – Wattle Health Australia Limited (ASX WHA) founded in 2011, is a vertically integrated milk powder and infant formula provider based in Melbourne Australia and also one of the largest milk formula export companies across Asia (China, Macao and India). With new deals inked across Asia, Wattle Health could be the next major milk stock to buy after A2 Milk (ASX A2M) and Bellamy’s (ASX BAL).
Make Your Money Work Harder For You
Picking the best shares to buy now, timing the entry and having an edge in the market is not easy. Our goal at MF & Co. is to make this process more accessible and easier for our clients. Download our special report below for another 5 best shares to buy now which comes with a special strategy that we use for our clients to make your money work harder for you.
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.