Although stocks in the FTSE 100 offer size, scale, stability and a great track record of growth (in most cases), their potential for capital gains has, historically, been lower than that of smaller companies. That’s not to say that smaller companies are better investments than large companies – they simply have, over time, tended to offer superior capital gains.
Clearly, smaller companies come with greater risk than their larger counterparts and, as ever, diversification is of paramount importance. However, they can have much greater catalysts that provide the scope for stunning share price gains.
Take, for example, AFC Energy (LSE: AFC). It develops alkaline fuel cell systems which, looking ahead, are likely to see a significant step-up in demand as cleaner power becomes a more integral part of our lives. As such, the company has signed various agreements and entered into joint ventures, notably in Korea, which have significantly boosted investor sentiment in recent months.
In fact, shares in AFC Energy have soared by 377% since the turn of the year and, looking ahead, more growth could be set to come. That’s because AFC is turning a great idea and product into a profitable business, with its recent interim results showing the company made its first half-year profit. Therefore, while its shares have performed well, they appear to still be worth buying.
Of course, going from loss to profit is a situation that online advertising company, Blinkx (LSE: BLNX), is focused on achieving. Its restructuring, rebranding and acquisition spree could take time to come good but, with a large cash pile and a sound strategy, it could prove to be a sound long term investment.
Clearly, though, the market does not agree. That’s because Blinkx’s share price continues to offer little upward momentum and, in reality, until Blinkx is able to deliver a sustained period of profitability, it may struggle to climb significantly. However, with a price to book (P/B) ratio of 0.7, there is a sufficiently wide margin of safety to invest in Blinkx at the present time.
Meanwhile, not all smaller companies are or have been loss-making in recent years. For example, wound care specialist, Advanced Medical Solutions (LSE: AMS), has been profitable in each of the last five years and offers a hugely consistent earnings profile. In fact, during those five years, the company averaged bottom line growth of 16% per annum and, as such, a price to earnings (P/E) ratio of 22.2 seems to be well-worth paying. That’s especially the case since a number of Advanced Medical Solutions’ larger peers offer less impressive growth numbers at a higher price.
So, while the FTSE 100 does have great appeal at the moment, smaller companies such as Blinkx, AFC Energy and Advanced Medical Solutions could prove to be even bigger winners for Foolish portfolios.
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Peter Stephens owns shares of Advanced Medical Solutions Group and AFC Energy. 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.