ASX small cap stocks are outrunning their larger counterparts since the bear market bottom on March 23.

The S&P/ASX Small Ordinaries (Index:^AXSO) bounced by nearly 40% since while the S&P/ASX 200 Index (Index:^AXJO) recovered by 22%.

There’s a real chance that smaller stocks can continue to outperform if we get firmer signs of the economic recovery from the COVID-19 pandemic.

That’s a big “if” but for the eternal optimists in us, there are still buying opportunities at the small end of the market even after the big run.

Here are two ASX small caps that brokers are urging investors to buy.

Dirt cheap

One that’s deeply undervalued is mining and construction engineering group NRW Holdings Limited (ASX: NWH), according to UBS.

The broker reiterated its “buy” recommendation on the stock after management’s latest trading update and guidance.

The group reported revenue of $1.6 billion and earnings before interest, tax, depreciation and amortisation (EBITDA) of $177 million for the 10 months to April.

“Annualised EBITDA and EBIT are 8% and 11% below UBSe, respectively,” said UBS.

“However, we expect this would not include claims recovery from higher COVID-19 related operating costs and we estimate profitability has historically been higher in Q4 vs Q3; both suggestive of upside risks.”

The broker’s 12-month price target on NRW is $4 a share.

Buy call retained

Another small cap that issued a trading update is Service Stream Limited (ASX:SSM). The infrastructure services group is forecasting FY20 EBITDA of around $108 million.

That’s below consensus estimates of $116 million and Macquarie Group Ltd’s (ASX: MQG) forecasts of $113.9 million.

The coronavirus fallout is impacting on group performance. The earnings miss is due to higher costs due to safety expenses, clients pausing work and the commencement of minor projects.

“With NBN activations remaining strong through 2H20, we suspect the weakness from delays are mixed and related to some reluctance on decision making from client to pursue projects and to interrupt connections in both utility and telecommunications whilst Australia works from home,” said Macquarie.

That’s good news in the sense that the headwind is transitionary. The broker also pointed out that Service Stream isn’t a beneficiary of the JobKeeper program unlike others. If the lift from the government program was excluded, Service Stream would be in a far superior position compared to peers.

Macquarie still expects Service Stream to be net cash positive by this financial year and reiterated its “outperform” recommendation on the stock with a price target of $2.88 a share.

More reading

• 3 super strong ASX 200 blue chip shares to buy right now
• Why this ASX infrastructure company could help protect your portfolio in a downturn
• Here are all the ASX 200 shares that have doubled or more since the bottom of the bear market
• Is Afterpay an ASX blue chip of tomorrow?
• Brokers name 3 ASX 200 shares to buy right now

Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Service Stream Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) is home to a large number of quality blue chip shares for investors to choose from.

In fact, there are so many it can be hard to decide which ones to buy.

To narrow things down for you, I’ve picked out three blue chip shares which I think are in the buy zone right now. They are as follows:

Coles Group Ltd (ASX: COL)

I think Coles is a great blue chip option for those searching for a combination of value, growth, and income. At present I feel the supermarket giant’s shares are trading on an attractive valuation in comparison to its peers. Especially given its solid growth potential thanks to its focus on automation, cost cutting, and expansion opportunities. In respect to automation, this focus is expected to lead to margin improvements over the long term. I feel this bodes well for Coles’ dividend growth over the next decade.

Goodman Group (ASX: GMG)

Another blue chip to consider buying is Goodman Group. It is an integrated commercial and industrial property group which owns, develops and manages industrial real estate in 17 countries. Goodman Group has made some very smart investments over the last decade, which I feel positions it perfectly for long term growth. These include gaining exposure to the structural tailwinds of the ecommerce market. Given how quickly online shopping is growing, these assets are likely to be in demand for a long time to come and should underpin solid earnings and distribution growth throughout the 2020s.

REA Group Limited (ASX: REA)

Another blue chip share to consider buying is REA Group. I think the property listings company is a great option due to the resilience of its business model. Even though listings volumes were down during 7% during the third quarter, it didn’t stop REA Group from growing its earnings. The company posted a 1% increase in revenue to $199.8 million and an 8% lift in operating earnings to $119.6 million. And while trading conditions are likely to remain tough in the near term because of the pandemic, I expect its earnings growth to accelerate once the crisis passes. I feel this makes it worth being patient with its shares.

More reading

• Here are all the ASX 200 shares that have doubled or more since the bottom of the bear market
• Is Afterpay an ASX blue chip of tomorrow?
• Brokers name 3 ASX 200 shares to buy right now
• Is Telstra about to be caught in a new mobile phone war?
• ASX 200 down 0.2%: Wesfarmers overhauls Target, Sydney Airport has no plans to raise equity

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I’ve been keeping a close eye on what substantial shareholders have been doing recently.

Substantial shareholders are shareholders that hold 5% or more of a company’s shares. These tend to be large investors, asset managers, and investment funds. These shareholders are obliged to update the market when they make any changes to their holdings.

As a result, I feel investors should look to use these notices to their advantage. After all, they show where the smart money is going.

Two notices that have caught my eye are summarised below:

Altium Limited (ASX: ALU)

According to a notice of initial substantial holder, Pinnacle Investment Management has just become a substantial shareholder of this electronic design software company. The notice reveals that Pinnacle has been adding to its position this month, bringing its total holding to 6,931,951 shares. This equates to a 5.29% stake in Altium. The fund manager was buying shares in or around the level Altium’s shares are trading at now. Which would appear to indicate that it believes they offer plenty of upside from here. I certainly believe this is the case and feel Altium is a top buy and hold option thanks to its exposure to the Internet of Things market.

Atomos Ltd (ASX: AMS)

According to a change of interests of substantial holder notice, Ellerston Capital has taken advantage of a pullback in this video hardware technology company’s share price to top up its position. The notice reveals that Ellerston has bought almost 6 million shares over the last couple of months. This lifted its holding to a total of 22,311,112 shares, which equates to 10.58% of its issued stock. The Atomos share price is down 72% from its 52-week high and at a level which this fund manager appears to believe is attractive. Its shares were hit hard after the pandemic shut down its core pro video market. But with economies slowly reopening around the world, this fund manager may be expecting a rebound in sales and its share price in the near future.

More reading

• Is the Altium share price a buy at $36?
• 3 top ASX growth shares that could smash the market in the 2020s
• 3 shares I’d buy if the coronavirus selloff gets worse
• How to become a millionaire with a $5,000 investment in ASX 200 shares each year
• 5 things to watch on the ASX 200 on Thursday

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Atomos Ltd. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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