5 top small-cap ASX stocks to watch in February

While they involve greater risk than their large-scale peers, small-cap stocks also bring the promise of more lucrative rewards given their higher growth potential as modest-sized companies.

A small-cap stock is generally defined as a company with a market capitalisation of between several hundred million to $2 billion.

As a result of this smaller size, they are often overlooked by both institutional and retail investors – especially given that players such as mutual funds will only invest in companies that have exceeded a certain market capitalisation threshold.

Small-cap stocks are also often overlooked by pundits and financial reporters, who prefer instead to focus on bigger companies with higher profiles and much larger market values.

Investors should still lend some attention to small-cap stocks, given their modest scale comes with potential advantages. By definition, they have far greater growth potential than large-scale companies that may have already maxed out in size. For this reason, small-cap stocks have the potential to deliver far greater capital gains.

Investors should also remain well aware, however, of the risks that accompany this greater growth potential. These include greater volatility during periods of market uncertainty and lower liquidity due to a smaller pool of interested buyers and sellers.

Smaller, fledgling companies can also be riskier investment propositions than larger companies, given they may not have established markets or access to favourable financing terms.

Despite the comparative lack of attention given to them, most of the roughly 2,000 companies that are listed on the ASX are categorised as small-cap shares. The benchmark indicator for the ASX small-cap share market is the S&P/ ASX Small Ordinaries Index (ASX: XSO), which is designed to measure companies included in the S7P/ASX 300 but not in the S&P/ASX 100.

Here is a list of five of the top ASX small-cap stocks to consider, for those investors who consider them an acceptable choice given their current risk/reward preferences.

1. Nitro Software Ltd

2. City Chic Collective Ltd

3. Adairs Ltd

4. Argosy Minerals

5. Brainchip Holdings

1. Nitro Software Ltd (ASX:NTO)

Founded in Melbourne by a trio of Australian developers in 2005, Nitro Software is a provider of software billed as an alternative to Adobe Acrobat for the editing and processing of PDF documents.

Its flagship application is Nitro PDF Pro which is available for use on both Macintosh and Windows computers.

The company says it currently has around three million licensed users, including around 13,000 businesses that receive services via nine global hubs.

According to Nitro, half of Fortune 500 companies have worked with its software team.

Nitro Software announced on 23 February that private equity firm Potential Capital had raised its takeover bid for the company to AU$532.3 million, in order to beat a rival offer from Alludo.

2. City Chic Collective Ltd (ASX: CCX)

City Chic is a multi-channel retailer that focuses on fashion for curvy women. It touts a collection of 'customer-led brands' that have acquired followings in Australia, the US, the UK, Europe and New Zealand.

City Chic has also seen its share price drop by more than 80% over the past year due to inventory and balance sheet concerns.

However, the company could soon see its financial health improve. It recently announced that an amended debt facility should shore up its financial position, while its inventory levels are set to come in below guidance for the first half.

3. Adairs Ltd (ASX: ADH)

As an independent provider of manchester goods and home furnishings, Adairs bills itself as Australia's 'largest omnichannel specialist retailer' in the space.

It owns and operates a trio of vertically integrated brands that include Adairs, Mocka and Focus on Furniture, with over 170 stories in Australia and New Zealand that operate alongside an expanding online presence.

Adairs' share price has dropped by roughly 20% over the past year, despite posting record revenues for the first half of FY23 which marked an increase of 34.1% over the same period last year.

The company has proven highly adaptable in the digital era, with online channels serving as a key growth driver and accounting for around 26.5% of all sales during the half.

4. Argosy Minerals (ASX: AGY)

Argosy specialises in the development of overseas lithium projects – a strong area of potential growth given the increasing uptake of electric vehicles globally, most of which make use of lithium-based batteries.

Its flagship development is the Rincon Lithium Project in Salta Province, Argentina, in which it currently holds a 77.5% interest. Argosy expects to eventually hold a 90% interest in the Rincon project.

In addition to Rincon, Argosy is also the full owner of the Tonopah Lithium Project in Nevada, USA.

5. Brainchip Holdings: (ASX: BRN)

Brainchip Holdings is an artificial intelligence company that claims to be the world's first commercial producer of neuromorphic processors that can mimic the way the human brain processes sensory inputs.

Brainchip's Akida neuromorphic processor has already found applications in the fields of smart car development and autonomous driving technology.

As an AI company, Brainchip's share price could also be positively affected by the buzz surrounding generative AI technologies such as ChatGPT.

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