Investing in microcaps – not for the faint-hearted

The microcap end of the stock market can be rewarding but is also risky.

The best stocks can go up 10 or 20 times, which is what attracts investors to this part of the market. However, there are also plenty that go to zero.

Investors need to be particularly mindful that microcap companies have liquidity and are well funded. Credit:Peter Braig

So, investing in the sector is not for the faint hearted.

Investors need to be particularly mindful of liquidity and ensure that companies are well funded. It is also crucial to take a portfolio approach to mitigate the inherent risk in the sector.

We at IFM Investors look for companies that have the potential to become small caps and then large caps over time and, eventually, billion-dollar market cap businesses.

We focus on competitive advantage, industry attractiveness, strength of the management team, and risks, including balance sheet and environmental, social and governance risks.

Here are some of our favourite microcap stocks.

Jaxsta (JXT-ASX) – A global music database

Jaxsta is a unique proprietary database for the music industry.

The data is verified – sourced from record companies – and stored in a central location and linked to make the information easy to search.

Who played the saxophone on that Grammy-winning song? Jaxsta can tell you. Who was the producer? What year was the song made? Where did it get to in the charts? Jaxsta can tell you.

For the music industry, this level of information is invaluable.

Jaxsta Pro could become a key tool for industry professionals worldwide.

Subscription revenue alone could top $200 million a year.

For consumers, music is one of the most asked about topics on any search engine. However, current sources of information are at best unreliable.

The consumer portal will drive advertising revenue.

For digital music companies like Spotify and Apple Music, Jaxsta will enrich their products with data that consumers want. This revenue opportunity in a multi-billion dollar sector is massive.

The market cap of the company, which currently trades at 35c, is about $75 million.

Next Science Ltd (NXS-ASX) – Global chronic wound care biotech

Next Science is a biotech company focused on infection control. It is the patent holder and developer of a unique non-toxic technology designed to eradicate biofilm based bacteria.

A biofilm is like a bomb shelter for bacteria and tends to be present in chronic wounds that prove resistant to healing. These wounds affect 11.6 million people in US, UK, Germany and Australia annually and they have a treatment cost of $9 billion a year.

Next Science’s core technology has been tested extensively in US hospitals and are proven to be up to 1000 times more effective than the next best treatment available.

The company has 4 products that are U.S. Food and Drug Administration registered that will likely generate revenue in FY19 and FY20.

The company listed at on the Australian Securities Exchange at $1 last month and is now trading at $1.70, giving it a market cap of about $300 million.

Conservative estimates of penetration into wound care markets globally over the medium term would suggest the company has significant earnings growth potential in the coming years.

Animoca Brands (AB1) – Blockchain gaming

Animoca Brands is a fast-growing technology company focused with on mobile gaming, especially the latest technology, which is blockchain gaming and collectible tokens.

The company is on track to deliver revenue of more than $30 million in 2019, with key revenue streams coming from mobile game titles such as Crazy Defence Heroes.

Revenue is set for strong growth as the company expands from Apple phones into Android phones and into new territories such as China.

However, really explosive growth is like to come from blockchain games and tokens.

The company's vision is access global blockchain through gaming. As an example, it is developing games with Formula 1, Major League Baseball and Bundesliga, the German Soccer league.

Not only will you be able to play these games online on your phone but you will be able to collect online tokens that are tradable.

The phenomenon has demonstrated the huge interest and dollars that can be created in this space – some tokens trade for hundreds of thousands of dollars.

With a market cap just over $100 million, the company is starting to get on the radar of global investors.

Neil Carter is Global Co-Head of Listed Equities at IFM Investors

IFM currently owns these stocks but may not continue do so in the future. They do not constitute investment recommendations. All investors are strongly encouraged to do their own research.

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