Best small-cap stocks on the ASX200

What is a small-cap stock?

A share market is often segmented according to the size of a company. That is: it’s market capitalisation – or market cap for short. A company’s market cap is calculated by multiplying its share price by the number of shares outstanding in the market.

Large-cap stocks are the ones that get most attention. They are the stock prices that end up reported on in the financial press. In Australia, one might point to the Commonwealth Bank of Australia (CBA) and the other Big 4 banks, healthcare darling CSL, or possibly one of the big miners like BHP and Rio Tinto, as such stocks. These companies are worth tens of billions of dollars and hold considerable weight to the overall ASX200.

Small-cap stocks however, as the name implies, are smaller. They sit outside the top 100 stocks on the ASX200. In Australia, a small-cap stock is defined as one with a market capitalisation anywhere from a few hundred million dollars, all the way to $2 billion. Although they don’t get the same attention as the market’s large-cap companies, Australian small caps include some of Australia’s most popular company brands.

Why trade small-cap stocks

The ASX200 is a very simple index: over 30% of its weighting belongs to the financials sector, and just shy of another 20% of its weighting belongs to the materials sector. Because the overall market is determined by the moves in very big and very liquid stocks, the ASX200 index, along with its biggest constituents, tend to trade in a relatively conservative way.

Although a safer way to trade, trading large-cap stocks means the opportunity for volatility is comparatively lower. Intraday moves in large-cap stocks tend to be narrower, meaning the potential to earn short-term profits by trading such stocks is limited.

Trading small-cap stocks is different. Owing to their smaller size, lower prices and thinner liquidity, the price of small-cap stocks tends to be more volatile, and therefore create greater opportunities to profit from short-term changes in prices. Trading small-cap stocks is higher risk but higher reward.

10 of the best small cap stocks on the ASX

The following are some of the most popularly traded small-cap stocks on the ASX200.

Bellamy’s Australia Ltd (BAL)

One of Tasmania’s finest corporate exports, Bellamy’s Australia Ltd (BAL) is a consumer staples stock specialising in producing Australian-made and certified organic foods. With a current market cap of $837 million, Bellamy’s is one of a handful of Australian stocks tapping into the growth in the booming Chinese middle-class. While experiencing solid growth over the last four years since floating on the ASX, 2018 was a challenging year for Bellamy’s, with the company’s share price shedding 30% throughout the year.

Sigma Healthcare Ltd (SIG)

Sigma Healthcare Ltd (SIG) wholesales and distributes pharmaceutical products, offering prescription, over-the-counter and generic pharmaceutical drugs to Australia’s growing healthcare sector. Like its industry counterparts and competitors, Sigma Healthcare is positioning itself to take advantage of Australia’s aging population. The company’s current market cap is about $590 million and its share price has traded within a range between $1.025 and $0.405. It’s been a challenging 2018 for Sigma Healthcare: the company’s year-to-date (YTD) return sits at -43.43%.

Corporate Travel Management Ltd (CTD)

Despite experiencing a year mired in controversy after being the target of activist short-sellers, Corporate Travel Management Ltd (CTD) has still managed a YTD return of over 3%. The company, as the name implies, offers corporate travel management services, operating on a fee-for-service basis. Boasting a market cap right on the border of what constitutes a small-cap stock, the fall in Corporate Travel Management’s share price since being the target of a short-selling campaign has many pundits calling a bottom for the stock.

Webjet Ltd (WEB)

A household name in Australia, and at times lauded as a corporate success story, Webjet Ltd (WEB) is a digital travel business, with a speciality in providing consumer and wholesale travel shopping and reservation services. The company has had a relatively successful year on the ASX200, delivering a +9% return in 2018. Given its solid growth in recent years, and with a market cap of over $1.5 billion, Webjet is one of the larger small-cap firms currently trading on the ASX.

JB Hi-Fi Ltd (JBH)

A staple brand for many Australian consumers, JB Hi-Fi Ltd (JBH) is a bricks-and-mortar retailer selling music and electronic goods. The company is another with a market cap right on the threshold of what might considered 'small-cap', possessing a market capitalisation slightly above $2 billion AUD. Although quite respectable growth in years gone by, JB Hi Fi has been mired in fears that it may eventually succumb to the 'Amazon effect', considering its reliance of physical real estate to sell its goods.

CSR Ltd (CSR)

A non-mining materials stock, CSR Ltd (CSR) is a manufacturer and supplier of building products. The company specialises in the production of plasterboard, glass, bricks and a variety of other products used in residential and commercial construction. Due to its relationship with the construction industry, CSR is a highly cyclical stock, strongly tied to the fortunes of the property market. Consequently, the company has been caught in the big Australian property slowdown of 2018, having lost 42% of its value in the space of eight months.

Blackmores (BKL)

Blackmores (BKL) manufactures a series of vitamin, herbal, mineral supplements, along with skin and hair treatment products. These products are marketed and sold to pharmaceutical retailers and healthcare professionals. As a company, Blackmores has positioned itself to take advantage of the booming Asian market at Australia’s door step. Partly for that reason, concerns about the region’s economic health, especially that of China, often weighs on Blackmore’s share price. Its YTD return in 2018 has been almost -30%.

GrainCorp Limited (GNC)

Australia’s future is said to be as the food bowl for Asia. Hence, agriculture is expected to become a major contributor of the country’s economic health. GrainCorp Limited (GNC) is a small-cap firm worth slightly more than $2 billion, and specialises in the processing and distribution of wheat, barley, canola and malt products. The GrainCorp share price is highly volatile, swinging with the fortunes of Asia’s economy: in 2017 alone, the stock traded in a nearly 45% range.

Bega Cheese Ltd (BGA)

With a market capitalisation a skerrick of $1 billion, Bega Cheese Ltd (BGA) is in the small-cap sweet spot. As the name suggests, Bega Cheese offers a series of cheese products, as well as whey powder, exporting primarily to Asian countries. Just as any company exposed to Asian economic health, 2018 has been a challenging year for the company, losing over 30% of its share price as fears about the impacts of the US-Sino trade war took hold.

Carsales.com Ltd (CAR)

Falling within the communication services sector, CarSales.com Ltd (CAR) owns a portfolio of automotive industry websites, including an automotive classifieds website. Vehicle sales are always a terrific barometer of consumer strength and confidence in an economy. Valued at over $2.5 billion, trading Carsales.com provides traders with an opportunity to try and profit from their view on Australian households. Considering the tough spot Australian consumers have found themselves in recently, Carsales.com’s share price has plunged almost 25% YTD.

How to trade small-cap stocks

Being as prone to volatility as small-cap stocks are, using CFDs to trade them can prove very profitable. Given that small-cap stocks are less liquid than their large cap cousins, trading with a CFD means that one does not have to worry about having to buy the physical stock to gain exposure to small-cap companies on the ASX200.

The risks are higher when trading small-cap stocks, so an effective risk management strategy should always be implemented to reflect the greater risk. If done correctly however, trading small-cap stocks can provide a trader with the ability to profit from different, exciting and potentially lucrative markets.