5 of the top ASX small-cap stocks in 2024

What are small-cap stocks?

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.

The top 5 ASX-listed small-cap stocks to watch

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. Temple & Webster Group Ltd (ASX: TPW)

2. Kelsian Group Ltd (ASX: KLS)

3. Adairs Ltd (ASX: ADH)

4. Regis Healthcare (ASX: REG)

5. Brainchip Holdings (ASX: BRN)

Temple & Webster Group Ltd (ASX: TPW)

Furniture and homeware retailer Temple & Webster Group Limited has leveraged a drop-shipping delivery model to bring products directly to the homes of customers, achieving 'faster delivery times and reducing the need to hold inventory.'

TPW bounced back from the impacts of the Covid pandemic in 2023 announcing in May that it had resumed year-on-year growth.

'In the face of turbulent macroeconomic conditions, it's incredibly satisfying to see Temple & Webster back in growth mode as we cycle out of periods impacted by COVID,' said CEO Mark Coulter. TPW said its cash position is strong, at $100 million with no debt.

Fund manager Wilson Asset Management is optimistic about TPW and expects it to gain market share, particularly given its investment in artificial intelligence to boost competitiveness.

In December, TPW insiders signaleld their confidence in the company by further expanding their holdings of company shares. They acquired $9.87m in equity to expand their cumulative holdings to $145m, accounting for 13% of TPW equity.

Kelsian Group Ltd (ASX: KLS)

Public transit provider KLS-AUrecently acquired All Aboard America, in a move that analysts have described as potentially transformational, granting the company access to the vast US market.

The company now has operations in Australia, Singapore, the UK and the US, covering the provision of charter services and transit services to clients from the government, corporate, education, LNG and tourism sectors.

Australian find manager IML is optimistic about the company, higlighting the potential for increased US earnings next year, making it one of the cheaper defensive and low risk growth stocks on offer.

Adairs Ltd (ASX: ADH)

As an independent provider of manchester goods and home furnishings, Adairs Ltdbills 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.

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.

ADH stands to benefit from a rebound in consumer spending in Australia, with ABS data pointing to a 2.2% rise in retail sales last November.

Regis Healthcare (ASX: REG)

Fund manager IMS expects Regis Healthcare Ltd to perform well in future on the back of changing Australia demographics, particularly as baby boomers reach the average assisted living age of 84. The aging of the population will give a strong impetus to players in the aged care sector like REG.

IMS further points out that the company has a strong balance sheet and improving fundamentals, leaving it 'very well positioned to be able to build new facilities to meet that demand.

REG posted a strong performance in the second half of 2024, with its share price leaping nearly 49% over the past six months.

Brainchip Holdings: (ASX: BRN)

BrainChip Holdings Limited 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 receive a boost from the huge buzz surrounding the potential of generative AI technologies such as Chat GPT.

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