ASX Small Caps: Best Shares to Buy for Growth

Investors on the ASX buy Small Caps or Small Cap Stocks for growth.

ASX Small Caps are interesting small companies that are positioned for growth.

These small caps (or small companies listed on the ASX) are mostly in the early stage of their business life cycle. Small Caps as a general rule are establishing their niche and they are often undervalued and misunderstood as most analysts do not cover them because they are simply too small.

ASX Small Caps are often cheap

Because they are early on in their business life cycle, and in the process of establishing themselves, small caps are often cheap. At Under the Radar Report we advise ASX investors to Buy Small Caps when they are cheap and to not chase the stock and pay a big price. You want to buy small caps when they are still priced for growth.

Small Caps because they are establishing themselves and are yet to prove themselves are much cheaper when compared with ASX listed Blue Chip shares. The value end of small caps, which is where Under the Radar Report hunts for small caps with growth potential and is where we focus have a PE of 12-14. But the average PE for the All Ords ASX Index is 16 ( but for a top industrial a blue chip share the PE can be 18 or 19 or even higher).

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ASX Small Caps in diverse industries

When investing in small caps you also get a much more diverse range of industries because they are by nature less established businesses and are often in disruptive industries, technology experts or niche fields. Small Caps offer real growth potential because disruptive businesses once established really grow. There are thousands of examples of this.

ASX Blue Chip shares in comparison are much more mature in their business cycle and are therefore by nature a less risky investment. But the ASX 200 (the top 200 ASX listed shares) are dominated by the big banks and resources companies. But it is very limited to a number of sectors (ie banking and resources and a few big name industrials), but essentially it does not give you the opportunity to invest in a variety of industries.

ASX Small Caps: How to manage a higher risk investment

Because they are smaller, and less known, it becomes important when you invest in ASX Small Caps that you look to manage your risk. These ASX small caps are mostly under researched by the share market participants. For example there would be 15-20 analysts covering the ASX Blue chip shares but you are lucky if one or two cover ASX small caps.

At Under the Radar Report our experienced team of analysts research each small cap we recommend, and we have a very strong performance record in our eight years of recommending small caps. Every member of our analyst team have all been researching and investing in ASX small caps for 25 plus years each.

Read more about our performance here.

Analysis of ASX small caps relies on the same principles as Blue Chip shares

Our small cap share analysts use the same investment principles as if they were researching and recommending blue chip shares. They look at the quality of earnings, the quality of management (especially important here) – we like it when management has a stake or has shares in the small cap – when you win, they win too. We look at sales diversification, the key drivers of the business – why would they grow? What is their competitive advantage? Can it increase its prices without losing customers? Plus of course the financials and the audited results. Our team speak to management regularly to keep up to date with the small cap and it’s progress.

You might like to read more about our ASX small caps investment philosophy here.

So proper independent share research for small caps is very important.

Dividend Paying ASX Small Caps

Another interesting fact about the small caps that Under the Radar Report recommends is that 50% of our ASX listed small caps.

We make it really easy for our subscribers to see which of our ASX small caps pay dividends. We list them all and you can search by their dividend yield. The dividend yield ranges from 9.2% to 0.4%. If a small cap stock is paying dividends it is not only some nice income for an ASX investor, it also shows that the company is established and making a healthy profit and they are often a less risky investment.

Should ASX Small Caps pay a dividend?

At some stages in a small caps’ life cycle it is actually important to be reinvesting any profit back into the company to power growth. Because the primary reason you are investing in small caps is because you believe in the company and its niche and see real growth opportunities for your investment dollar. If it is not performing as it should, perhaps it’s time to sell and to put your money into a different small cap that is performing and can deliver you growth which the share market rewards with an increase in the small caps share price.

Investing in Small Caps is fun

Small Caps are also really fascinating to learn about. You become a shareholder or a part owner in a small business that is in a massive growth phase. You get to learn about the business and it’s point of difference, whether it be Austal (ASB) a global designer and builder of ships with ship yards in Western Australia who makes battle ships for the US Navy, to Money3 (MNY) a niche lender primarily focussed on providing secured auto loans to people that have trouble accessing finance from traditional lenders to some amazing medtech stocks whose technologies are being developed to help people across the globe.

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