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Date : 07/08/2023

These ASX Small-Cap Stocks are Poised To Be Future Blue Chips Stars

Opportunities abound in every market segment; ASX small-cap stocks have the potential to offer transformative returns. While large corporations often need help with slower growth due to market saturation, small enterprises have room for considerable expansion.

The challenge lies in identifying those ASX small-cap stocks that possess the necessary characteristics to evolve into significantly larger businesses. An example to consider is CSL Limited (ASX: CSL), which made its ASX debut in 1994 with a valuation below $400 million. Today, it dominates the Australian stock market, boasting a market capitalisation approaching $130 billion.

While emulating the success story of CSL may seem daunting due to the extraordinary expansion of this biotech company, we firmly believe several ASX stocks have yet to mature from small-cap status to full-fledged blue-chip entities. Let’s delve into a few such prospects that we find promising.

Collins Foods Ltd (ASX: CKF)

Collins Foods Ltd (ASX: CKF) is the primary operator of KFC franchises in Australia and has made a substantial mark in the fast-food industry. Having opened its first restaurant in Queensland in 1969, the franchise has grown exponentially, now operating 300 restaurants across Australia, Germany, and the Netherlands.

By remitting a modest royalty to Yum! Brands, Collins Foods has capitalised on a well-established and internationally recognised fast-food brand. Over the last five years, KFC has consistently outperformed competitors McDonald’s and Domino’s in local online searches.

Looking ahead, Collins Foods can further scale its operations by venturing into new markets and adding more brands to its portfolio. Given strategic management, this small-cap stock could reach a status comparable to Domino’s Pizza Enterprises Ltd (ASX: DMP), a firm currently approximately four times larger.

Collins Foods Ltd Shares

Nanosonics Ltd (ASX: NAN)

Medical device companies have historically formed a substantial portion of the blue-chip landscape, owing to their patented technologies and lucrative business models. Still, within the small-cap spectrum, Nanosonics specialises in producing devices that automate medical equipment’s disinfection process.

Nanosonics Ltd (ASX: NAN) is in an expansion phase, and its revenue is being reinvested into sales expenses, research, and development. This strategy indicates that the company’s full earnings potential has yet to be realised.

With the global healthcare infrastructure facing escalating pressure, there’s a surging demand for innovative solutions like those offered by Nanosonics. For instance, earlier this year, NHS Scotland had to outsource decontamination services due to capacity constraints, a situation likely to be repeated elsewhere, thus enhancing the prospects for this ASX small-cap stock.

ASX Nanosonics Ltd shares

Nick Scali Limited (ASX: NCK)

The selling of premium furniture may not appear glamorous. Still, it’s proven a successful strategy for firms such as the US-based RH (NYSE: RH), which holds a market capitalisation of US$8.6 billion. A similar success story in Australia is that of luxury furniture retailer Nick Scali.

While Nick Scali Limited (ASX: NCK) might not carry the same glamour as some high-profile tech firms, it has been delivering an impressive performance. For instance, in the past year, it recorded a return on capital employed (ROCE) of 35%, surpassing the 20% ROCE of the tech superstar WiseTech Global Ltd (ASX: WTC).

Over the past decade, Nick Scali’s annual revenue has catapulted from $118.5 million to $544.5 million. Despite this outstanding retail growth, the company’s price-to-earnings (P/E) ratio is a mere 8.5 times earnings.

This low P/E ratio drastically undervalues this high-performing business. Nick Scali will continue to be a successful enterprise a decade from now, potentially generating even higher profits.

If the company sustains its current high-performance levels, it’s plausible to speculate that this ASX small-cap could ascend to the upper echelons of the stock market.

ASX Nick Scali Limited shares

 

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