3 small-cap shares primed to explode in 2017

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Image: Gear4music: Fair use

If you're on the hunt for stocks that should do far better than most in 2017, look no further than online musical instrument seller Gear4music(LSE:G4M), automation software provider Blue Prism(LSE: PRSM) and gaming services company Keywords Studios(LSE: KWS).  Here's why.

Ahead of the game

One thing that connects the above is that their most recent trading updates or results all made reference to performing "ahead of expectations". These are the sort of words that investors should listen out for.

When I first looked at Gear4music back in August, I was struck by just how good the investment case was. Since then, the company has gone from strength to strength and its shares are up by almost 180% to 459p. October's interim results made for wonderful reading (with revenue and gross profits jumping 73% and 74% respectively compared to the same period in 2015). And in November, the company opened its first European facility in Sweden. It plans to open another -- in Germany -- early in 2017.

Given that consumers appear to have shrugged off fears surrounding our departure from the EU (at least for now), Gear4music should have benefitted from a bumper few weeks of pre-Christmas trading. It next reports to market in early January. Assuming momentum has been sustained, watch out for fireworks.

In its last update in November, Blue Prism reported that it had secured lots of new business (bringing the number of customers to 153 compared to 57 in 2015). This fact, when coupled with significant upsells from existing clients, has led the company to bring forward the investment in sales and marketing it had planned for next year.  

Given that it's still to turn a profit, Blue Prism won't be every investor's cup of tea. Nevertheless, given the massive growth expected in the industry in which it operates, I think next year could be very exciting for those investors willing to embrace more risk.

It's also been a busy 2016 for £274m cap Keywords Studios thanks to a series of acquisitions. One of these -- localisation and audio company Synthesis -- performed particularly well during the second half of the financial year and better than previously anticipated. Elsewhere, Keywords noted a "sustained increase in demand" for its art services as well as decent business for its functional testing and customer services divisions.

Although trading on a high forecast price-to-earnings (P/E) ratio of 30, I'm optimistic that Keywords' high growth strategy will continue to pay off over the next 12 months, particularly as the company pushes to increase its international footprint.

Buyer beware

While there are absolutely no guarantees in investing, my biggest reason for being bullish on the above is for the simple fact that I'm struggling to think of reasons not to continue holding their shares. This can be a really helpful way of avoiding confirmation bias, our all-too-human tendency to seek out information that agrees with our tightly-held opinions. 

So, should you buy all three shares? Not necessarily. Before investing your hard-earned capital in any small company, it's important to bear in mind that their stock prices can be a lot more volatile than your average blue chip. As always, it's vital to ascertain your risk-tolerance, financial goals and investing horizon before clicking the buy button. If you can't afford to be wrong, you can't afford to invest.

That said, if these three shares have whetted your investing palate, you'll definitely want to take a look at aspecial FREE report penned by Mark Rogers at the Motley Fool. He thinks he's found another top small cap that deserves your attention, a high-quality business that could offer double-digit earnings growth at little cost.

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Paul Summers owns shares in Gear4music, Blue Prism and Keywords Studios. The Motley Fool UK has recommended Keywords Studios. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.