You could find the best opportunities for growth on the ASX in the hunting ground of small caps.
It's much easier for a business to double in size from $250 million to $500 million than it is to go from $2.5 billion to $5 billion.
Over the long-term I think the shares that have got the best potential for returns are either the ones with the greatest economic moats, or the ones that are quite small and have a long growth runway.
Here are three of my favourite small cap ideas for growth:
Bubs Australia Ltd (ASX: BUB)
Bubs is an infant formula business, except most of its revenue comes from goat milk products. I have been impressed by what Bubs achieved in its short time on the ASX.
It acquired NuLac Foods, which gave it exclusive supply from the country's biggest goat milking herd. It acquired Australia Deloraine Diary, a CNCA approved infant formula manufacturing facility. It has signed a number of agreements to expand its sales reach, the deals with Chemist Warehouse and Alibaba's Tmall seem particularly clever.
Bubs is launching into new countries and launching new products regularly. The organic (cow) grass-fed formula products could be particularly attractive to consumers over time.
Bubs is set up for strong long-term growth and its revenue is rising rapidly.
Propel Funeral Partners Ltd (ASX: PFP)
Propel is the second largest funeral operator in Australia and New Zealand. It's much smaller than InvoCare Limited (ASX: IVC), so it has a much longer acquisition growth runway before its market share becomes an issue for competition regulators.
The funeral industry has a compelling growth future. Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050.
When you combine that organic volume growth of the industry with the rising price of funerals, hopefully better profit margins, plus acquisitions, it should lead to good earnings growth over the next decade.
WAM Microcap Limited (ASX: WMI)
Finding good small caps can be difficult. It can be tough getting the right price and it may also be hard to know what the right position size for your portfolio is.
I'm happy to leave a lot of my small cap investing to one of the best small cap investing teams in Australia, WAM Microcap.
Since the listed investment company (LIC) was formed in June 2017, its portfolio has produced an average return per annum of 21.9% before fees, expenses and taxes. That's a great performance and I think WAM Microcap could be one of the best fund performers over the next decade.
Foolish takeaway
Propel is definitely the defensive pick of the three, I wouldn't be surprised to see its dividend rise consistently over the next 10 years. Bubs definitely has the potential to be one of the best-performing shares this decade. But WAM Microcap's performance has been really strong and it gives a lot of diversification in a single investment.
