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5 small-caps with solid fundamentals

Every investor wants to pick the next big thing, yet with the sheer volume of stocks available on the ASX, coupled with the ubiquitous hype that surrounds the flavours of the month, it can be easy to overlook even the most obvious opportunities.

While unproven and unprofitable big names like Brainchip and Airtasker generate excitement and FOMO with rollercoaster share price movements, Facebook groups, and meme-generating Reddits, there are always plenty of under-the-radar companies putting out solid results regardless of their size.

With over 2000 stocks on the ASX and most analysts focusing on the top 300, there are hundreds of companies that rarely receive any coverage.

So how can investors filter through the noise and narrow their options?

First things first, small-cap companies tend to be riskier investments than large-cap companies. While they may have greater growth potential to offer better returns over the long-term, they do not always have the resources of large-caps, making them more vulnerable to negative events and bearish sentiments. Low trading liquidity can generate huge volatility and even provide the opportunity for extreme market manipulation. Although with patience and a competent risk management strategy, small-cap stocks can present some compelling opportunities.

Here are five stocks that together have a combined market cap value less than the smallest ASX 300 company, yet all five companies have:

  • Commercialised products and services

  • Generating real revenue and net profits for shareholders

  • Healthy balance sheets and cash positions with little to reasonable debt levels

  • Relatively low price-earnings multiples

  • Consistent ROE and ROA

Austco is an international provider of healthcare communication and clinical workflow management solutions. They support healthcare facilities through a global reseller network which includes growing markets in health, aged care and acute care.

Market Cap - $9.0m PE Ratio - 7.8

Revenue - $33.0m ROE - 15.4%

NPAT - $2.5m ROA - 11.1%

Connexion Telematics develops smart car technology for the automotive industry. It is an Internet of Things technology company revolutionising smart car technology.

Market Cap - $13.2m PE Ratio - 4.17

Revenue - $8.4m ROE - 68.7%

NPAT - $3.2m ROA - 57.5%

EZZ Life Science is a wholesale distributor of a range of skincare products under the EAORON brand to pharmacies, supermarkets and specialist retailers in Australia and New Zealand. It also develops, produces and distributes consumer health products under its own brand, EZZ, to retailers in Australia and New Zealand as well as consumers in China, with plans to expand to other international markets.

Market Cap - $31.9m PE Ratio - 13.2

Revenue - $17.3m ROE - 98.0%

NPAT - $1.6m ROA - 34.9%

Hubify is an enterprise solutions provider which has developed a platform based on global connectivity and customer engagement. The group provides global engagement and value-add Insuretech solutions to the insurance and travel industry to allow them to increase end-customer engagement. They also offer local telecommunications services to SMB across Australia.

Market Cap - $38.7m PE Ratio - 3.4

Revenue - $16.4m ROE - 49.8%

NPAT - $2.6m ROA - 29.3%

Vita Life Sciences is a pharmaceutical and healthcare company, mainly engaged in formulating, packaging, sales and distribution of over the counter medicines, health supplements, vitamins and investments. VLS has four major brands - Vita Health, Herbs of Gold and VitaScience, VitaLife. They have over 700 vitamins and supplements sold in 7 countries in Australia & Asia Pacific region.

Market Cap - $54,1m PE Ratio - 8.6

Revenue - $47.1m ROE - 24.7%

NPAT - $6.1m ROA - 15.8%

Be aware of the risks in any investment

While solid fundamentals are just the beginning of any equity research, they can provide a valuable filter to separate the worthwhile candidates from the popular hype, pumping the promises of tomorrow. Detailed research should also look at management performance and remuneration, risks such as client concentration or industry changes, among many other things.

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