I have always loved investing in small cap stocks. Simply, not only are they more fun to analyze (who needs to read 40 analyst reports on BCE, anyways?), but they are also (often) more profitable for investors than large companies.
Because of our company’s ‘no-conflict’ policy, I can no longer invest in Canadian small caps. However, that doesn’t mean we can’t tell you about a few of our favourites, which we will discuss below. Keep in mind, always, that small companies can be inherently riskier than large companies. They do not have the executive depth, financial resources nor the cash flow large companies typically have. When buying small caps, your investment time frame should be longer, and you should go in expecting share-price volatility. Here are five of our Canadian favourites. All are in our Model Growth Portfolio for clients:
You don’t need a spreadsheet to see these five companies are strong buysFive market head-shakers, from cannabis for your dog to Amazon’s amazing research budgetFive ways individual investors can beat the pros at their own game
Reliq Health Care (RHT on TSX-V) — Market cap.: $177 million
Reliq shares are up 37 per cent this year alone and more than 1,000 per cent in the past 52 weeks. Certainly, that’s the type of small cap performance we like to see! Reliq is a growing company in the fast-changing healthcare monitoring industry. Simply put, its business allows doctors to remotely monitor and advise patients in their own homes. With some new contracts, revenue is expected to go from near zero to more than $26 million in the next year. The company has some cash but will likely need more if it continues to grow quickly.
Photon Control (PHO on TSX-V) — Market cap.: $251 million
Photon shares hit more new highs this week, with the stock now up 24 per cent for the year, and more than 73 per cent in the past 52 weeks. Photon sells products and services to customers in the semi-conductor industry, and while that sector bounces around Photon’s sales continue to grow. Revenue has gone from $10 million in 2012 to more than $60 million (estimated) next year. At 22 times’ earnings, the stock is not too expensive, and it remains debt-free with a nice cash position.
Covalon (COV on TSX-V) — Market cap.: $128 million
Covalon shares nearly doubled this month, before slipping back a bit. It is now up 21 per cent in 2018 and 172 per cent in the past year. The stock had been drifting for some time, and then — wham! — it announces a $100 million contract. The contract should double the company’s revenues, and it looks like margins will stay solid with the new business as well. Investors — not surprisingly — loved the news. Covalon develops wound care and surgical applications and coatings. Insiders own 45 per cent and it is debt-free and was profitable last year.
People Corp. (PEO on TSX-V) — Market cap.: $445 million
PEO stock is up more than 20-fold since its lows of 2012. Despite its (now) larger market cap, trading liquidity for shares is very thin, and investors should be cautious because of this. Still, for years it has been a ‘slow and steady’ type of company, with revenue rising from $43 million to $131 million in the past four years. People offers employee benefits consulting and third-party pension and administration services. It has grown via acquisitions and many see it as a target itself, one day.
Alcanna Inc. (CLIQ on TSX) — Market cap.: $342 million
CLIQ is the new symbol and Alcanna is the new name for Liquor Stores NA Limited. Shares are down 13 per cent year to date. Now, we remain cautious on the marijuana sector, largely due to valuations, but Alcanna has run liquor stores for decades, and now has a giant fresh capital injection from Aurora Cannabis Inc. and a partnership with that company to sell cannabis products in its network. Aurora owns 24 per cent of the company now. We are surprised that Alcanna shares have not done better with this relationship. Every other marijuana company in Canada has giant valuations on next-to-no sales, yet Alcanna already has nearly $600 million in revenue (admittedly, lower margin liquor sales) and market cap is half that. At least there is a business to fall back on if the whole marijuana thing in Canada does not go as expected. Sure, the ‘old’ Alcanna had struggled in the past few year, but at least it has been profitable since 2004. There is not a single marijuana-industry company that can say that, certainly.
Peter Hodson, CFA, is Founder and Head of Research of 5i Research Inc., an independent research network providing conflict-free advice to individual investors (http://www.5iresearch.ca).