The three best small caps you’ve never heard of

These overlooked small caps may be the cure for poor returns in your portfolio

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Maker of premium mixers Fevertree Drinks (LSE: FEVR) has rewarded shareholders with over 250% gains since going public in 2014 and has tailwinds at its back suggesting growth isn’t done yet. Fevertree has taken advantage of the rising popularity of craft cocktails, which its premium tipples are designed to be an integral part of. The demand for these upmarket tonics and ginger ales is evidenced by the company’s 71% rise in revenue in 2015.

The key to Fevretree’s rapid expansion is its asset-light business model that outsources all capital-intensive manufacturing and distribution to third-party partners. This means that the company can expand briskly while still maintaining a healthy balance sheet, which at year end had net cash of £11.6m. The company has wisely reinvested earnings into expanding globally, and now brings in roughly two-thirds of sales from outside the UK. As long as the market for premium mixers (of which Fevertree has roughly 50% global share) continues to grow, its award winning drinks and asset-light model should stand it in good stead.

Offshore opportunities

Gulf Marine Services’ (LSE: GMS) self-elevating support vessels for offshore oil rigs aren’t as exciting as designing craft cocktail mixers, but GMS offers investors greater stability and higher dividends. Although the bottom may have fallen out on crude prices, GMS’s vessels were still in use by customers 98% of their available time in 2015. GMS financials for the year reflect this: revenue rose 12% as several new vessels entered service.

These new vessels came with a flipside though, as their construction resulted in net debt rising to $398m at year-end. With a market cap of around £170m, this is a worrying number. However, this debt level should be manageable as capex spending will fall dramatically as the last of the new vessels under construction is completed this year. Furthermore, the company produced $125m in operating cash flow last year and, as 80% of its vessels are contracted out for opex rather than capex, this should be sustainable even if crude prices remain low. Looking forward, investors who aren’t put off by GMS’s debt burden may find shares intriguing at a 3.5 forward P/E ratio and offering a 3.2% yielding dividend.

Banking on profits

While the UK’s domestic banks have stagnated due to low returns, slashed dividends and billions in fines since the financial crisis, the holding company for Bank of Georgia, BGEO Group (LSE: BGEO), has rewarded shareholders handsomely. Share prices are up 123% since going public in 2012 as the bank continues to post solid results year after year.

2015 was more of the same as profits rose 29% to £87m and assets grew a full 33%. BGEO has achieved these results by focusing on personal and business retail banking while keeping costs low. This led to yearly return on equity of 25.1% and a miniscule cost-to-income ratio of 35.7%. Shares are priced at 1.6 times book value, suggesting the market is already pricing-in significant growth for BGEO. Despite this, Bank of Georgia remains well run, is lightly leveraged and offers a 3.3% yielding dividend to investors who are looking for international exposure.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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