In this brutal bear market in shares, some of the worst performing companies have been small caps. It has seemed that whatever the individual merits of these fast-growing businesses, their share prices have taken a hit. And this adds to the greater volatility that you always encounter with small, fast-growing companies.
But as this long and difficult bear market draws to a close, I think it’s worth taking a fresh look at small caps. Many of these are now as cheap as chips, and they still have great growth prospects. So let’s take a look at two companies that show real promise.
Sirius Minerals
Sirius Minerals (LSE: SXX) is a business that aims to develop a North Yorkshire mine that has one of the largest deposits of polyhalite, a type of potash, in the world. This polyhalite is highly valued as fertiliser, and once the mine is fully operational, it will be a money-spinner.
The firm has already received planning permission from the North York Moors National Park Authority, and is building financing so that it can start mining.
The judgement you make in buying into this company is very simple. Will the mine go ahead, or will it not? As a binary play, this means it’s risky, but the scope for profitability and share price increases is great.
Plus500
Plus500 (LSE: PLUS) is a rapidly-growing trading app and website. You may have seen its ads on TV and the web. It’s a company that provides an internet and smartphone platform for small investors who want to trade on global markets. The platform has been marketed strongly, and earnings have been growing rapidly.
But this is a firm that hasn’t been without controversy. In May 2015 the stock plunged almost 60% after it moved to freeze 55% of its UK based trader accounts, as the UK Financial Conduct Authority conducted a review into anti-money laundering controls.
Many investors would have been panicked into selling their holding at this point, although most customers were able to access their funds after two months. The share price has now recovered to near the levels before the scare. This illustrates the dangers of small caps – even if there’s nothing intrinsically wrong with these businesses, short-term panics can very easily scare you out of these stocks. Yet, a year later, I’m still confident about Plus500’s growth prospects.
Foolish bottom line
As always with small caps, an exciting opportunity comes with greater risk. I would say buying into these firms should be part of investing in a broad range of growth and value shares – don’t put all your eggs in one basket.
Having said that, if I had to choose between these two companies, I think both have merits, but I might just take a punt on Sirius.