Looking to boost your portfolio gains? Sometimes, thinking big isn’t the answer, when you should be thinking small.
It’s true that a very low or rapidly dwindling market cap might spell trouble, but there are many benefits to investing in smaller companies.
And if you have stayed away from small-cap Canadian stocks till now simply because you think they might not be worth it, this list of some of the best small-cap stocks in Canada might help you realize what you are missing out on.
What Are Small-Cap Stocks?
Before we get to the small-cap stocks in Canada, you should understand what small-cap stocks are.
If we go by the accepted international practice, or at least the thresholds used in the US (endorsed by Forbes and Investopedia), define small-cap stocks as stocks with a market capitalization between $300 million and $2 billion. The category above it is mid-cap, and below are micro-cap stocks.
For Canada, the definitions vary a bit. Mackenzie Investments put small-cap stocks between $100 million and $1.5 billion in market capitalization. However, a more authentic and relatively pure source, S&P Global offers a slightly different picture.
The minimum market cap in the S&P/TSX SmallCap Select Index is slightly over $200 million, whereas the largest is about $2 billion.
This is quite close to the US practice. For this article, I stuck to the $300 million to $2 billion market-cap thresholds. That alone is an extensive pool and includes hundreds of amazing securities. Fifteen of which (along with some honourable mentions) should definitely be on your radar.
The Best Small-cap Canadian stocks
The stocks below are mixed between growth and dividend stocks and are in the order of the market cap (from highest to lowest). Unless otherwise specified, all the stocks below trade on the senior exchange (TSX).
- Goeasy (GSY.TO)
- Labrador Iron Ore Royalty (LIF.TO)
- StorageVault Canada (SVI.TO)
- Ballard Power Systems (BLDP.TO)
- Cargojet (CJT.TO)
- Coveo Solutions (CVO.TO)
- WELL Health Technologies (WELL.TO)
- Slate Groceries REIT (SGR-UN.TO)
- TerraVest (TVK.TO)
- MCAN Mortgage (MKP.TO)
- Automotive Properties REIT (APR-UN.TO)
Goeasy is one of Canada’s most well-known alternative financial companies that has been around for over three decades and has catered to over 1.3 million Canadians to date.
The primary financial product of the company was “easyhome,” which allowed its customers to lease products like furniture and appliances. By the end of the lease, they would own the product.
In 2006, the company introduced EasyFinancial, which offered small personal loans to people with weak credit that do not qualify for bank loans, which quickly became the dominant financial product of the market.
In 2022, it represented about 75% of the company’s total locations and 96.8% of the gross loan value generated in the year.
The financial growth of this small-cap has been stellar – with revenues growing by five times between 2012 and 2022 and adjusted net income by over 17 times.
This growth has also been quite consistent, even though financially troublesome in 2020. The insider ownership proportion of the company is enormous – over 22%, with 18% owned by a single board member.
This financial growth was, to an extent, mimicked by the stock, especially in the last decade. The stock has risen by over 820% between Sep 2013 and Sep 2023, and that’s when it’s trading at a 41% price discount. If not for that, the growth would be in four digits.
It also emerged as one of the most generous dividend aristocrats, though it has paced itself, and now the dividend growth seems quite sustainable. The payout ratio has always been rock solid, even if we compare it to banks.
You should be wary of the brutal correction the stock is still reeling from, and it does cast doubts over the short-term return potential of the company.
But if you are planning on holding the company long-term, the prospects do look relatively bright since its fundamental strengths remain, and its financials and valuation seem supportive of an upcoming bullish phase.
2. Labrador Iron Ore Royalty
Labrador Iron Ore Royalty (LIORC) – the name explains the company’s business model quite well. The company owns about 15.1% of the Iron Ore Company of Canada (IOC), along with Rio Tinto and Mitsubishi.
It’s an integrated iron ore business with everything, including transportation through the railway and a dedicated terminal under the company’s umbrella. The current estimated reserve life is about 24 years.
Unlike other royalty companies with diverse portfolios, LIORC has virtually no separation from IOC, so if it fails, so does LIORC. This is a significant risk factor.
But it’s mitigated by the fact that over 50% of the company is owned by Rio Tinto, one of the largest mining companies in the world with ample resources and connections in the industry to keep IOC afloat and profitable (unless demand dries up, which is unlikely).
This direct exposure means that the stock is exposed to iron ore price fluctuations that, in turn, are exposed to steel prices and demand. Hence, it’s easy to see the similarities between the stock’s performance and iron ore performance.
As a base metal, iron offers a different mineral/metal exposure compared to market-contrarian, precious metals that can be used as a hedge.
Global economic conditions influence base metals. Still, the stock has performed quite well, especially between Jan 2016 and Sep 2023, when the stock inconsistently grew over 300%.
The dividends are inconsistent but quite generous, especially since 2020. It also carries virtually no debt and is a financially lean business with minimal overhead expenses.
If you like consistent stocks with reliable growth and dividends, this erratic small-cap might not be the best fit for you.
But if you can get around its unpredictable nature, it may offer decent returns over the long term and exceptional returns in the short term if you can ride its bullish trends. Keeping an eye on iron ore prices might give you a good indication of the stock’s movement.
3. StorageVault Canada
This small-cap stock is a giant in a niche real estate market, i.e., storage spaces. It’s the largest storage provider in the country, with a portfolio of about 238 (from ten stores in 2014) physical locations (including 206 directly owned) and 4,500 portable storage units.
It’s an acquisition-oriented company that now owns eight major brands connected to the storage industry.
The financials of the company experienced similar growth, with Adjusted Funds From Operations (AFFO), which is a metric used to evaluate the value of REITs, growing by four times between 2017 and 2022. The stock also grew over 300% over that period and returned slightly more via its dividends.
This leadership status and the supporting financials are the major strengths of this stock. Unfortunately, the stock grew too rapidly for its own good, and it’s currently quite aggressively overvalued.
It also carries a debt large enough to match its market capitalization, but that’s justifiable for this business model.
Just about 42% of the company is owned by the public. The CEO bought a decent number of shares when the company slumped, which may indicate leadership trust in the company.
The past performance of the stock is a strong enough case for it, but it’s balanced by the bloated valuation.
However, you should also base your decision on the financial strength/growth of the company, its dominant market position, and lack of competition.
4. Ballard Power Systems
Ballard Power Systems represents a relatively underrepresented slice of green technologies – fuel cells.
The fuel cell technology relies upon hydrogen as a fuel, and since the infrastructure around hydrogen extraction and transportation is in its infancy, it naturally limits the company’s organic growth prospects.
However, the importance and potential of the fuel cell technology cannot be ignored.
Zero Emission Vehicles (ZEVs) based on this technology are significantly lighter than battery-based EVs and are far greener if you consider the emissions associated with metal mining for car batteries.
The stock itself experienced exceptional growth during COVID – over 400% between Jan 2020 and Feb 2022. The correction that followed pushed the company down 88% and into the small-cap pool.
The financials have taken an even worse hit, and between 2015 and 2022, the net loss grew from $6.5 million to $173 million.
But there is a bright side to the financials, too. The company has minimal debt ($18 million at the time of writing) and over a billion dollars in cash and investments.
You cannot ignore the financial risk when evaluating this stock and its brutal decline. But it’s important that you realize that Ballard is well-positioned to take advantage of a trend that is slowly building up.
As hydrogen becomes a more mainstream part of the global renewable/green energy mix, Ballard’s financials can take off, and the stock may soon follow.
Cargojet used to be a mid-cap, but after losing over half of its market value, it’s now languishing in the small-cap pool.
It’s one of the largest cargo airlines in North America, with a fleet of about 49 aircraft. It specializes in time-sensitive deliveries and has a high-reliability score in this regard (98.5%).
Between 2012 and 2022, the company steadily grew its revenue by over 5.7 times and has considerably shifted its revenue mix.
In 2012, over 65% of its revenues came from domestic deliveries, and the number has dropped below 50% by now. It flies some very attractive international routes and is well-positioned to take advantage of the e-commerce boom.
About 2.6% of the company is owned by insiders and over 47% by institutions, including 14% by Royal Bank of Canada’s wealth management division.
The company carries significant debt, but considering its revenue growth and net income, the company may most likely be able to remain ahead of its debt obligations.
Cargojet was one of the most powerful growth stocks of the last decade, and between Jan 2011 and its Nov 2020 peak, the stock rose by almost 2,700%. It’s going through a correction phase right now, and its value has already reached the “fair” level.
If you are worried about Cargojet’s current slump and are unsure about when it may end, it may be prudent to wait. However, there is a decent chance that the stock might go up rapidly.
It’s trading far below its target price of mid $100s (as it’s still in double digits), and most positive factors have lined up for the stock to turn things around.
6. Coveo Solutions
Coveo Solutions is an enterprise Software as a Service (SaaS) company, which means that its software/platform is developed for relatively large businesses.
It also markets itself as a leader in applied Artificial Intelligence (AI) because of how much its main product (Coveo Relevance Cloud) is infused with it.
The integration capabilities of its cloud with other technologies and providers like SAP, Adobe, and ZenDesk is another major strength.
In the last two years (2022 and 2023), the company has grown its number of enterprise customers from 600 to 650 and its revenues by over 33%. Even though it’s a bit overvalued, the company carries almost no debt and has considerable cash and investments.
Coveo is one of the companies that are proving that AI is more than just a buzzword, and even though it’s not on the level of technologies like ChatGPT, the pace it’s growing its enterprise customers at is quite significant.
If it continues penetrating the target market at this pace, it may start generating a net income instead of a net loss in the coming years.
Coveo is a promising prospect, and even though you should take its weak financials into account, its organic and revenue growth may turn things around soon, maybe in the next few quarters.
The stock will most likely follow suit, especially if the tech sector at large is bullish.
7. WELL Health Technologies
WELL Health Technologies represent an emerging market – digital health. It operates in the healthcare professionals’/providers’ end of the market and empowers them to leverage technology for better healthcare delivery.
It has developed a comprehensive network of healthcare professionals and facilities, as well as a digital health ecosystem.
With the 22,000 healthcare professionals that use the WELL Health platform (including 2,500 providers directly connected to the company), it has interacted with over 4.6 million customers in the US and Canada.
The company has recently become cash-positive and generated a small net income in 2022. About 8% of the company is owned by insiders.
The company has benefitted from leadership consistency, with the founder serving as the CEO since 2017. He also owns about 6% of the company.
Despite its financials weighing it down, the stock experienced a powerful surge in the post-pandemic market and is on the rise again.
You should be wary of its financials, but it would be smart to evaluate this stock from more than just its financial fundamentals.
It has experienced powerful organic growth, and both financials and stock might start reacting positively to it in the near future.
8. Slate Groceries REIT
Slate Groceries REIT is a pure-play grocery-oriented REIT, which essentially means that all of its 117 properties (all in the US) are anchored by grocery businesses.
Over 18% of its tenant portfolio is made up of Kroger and Walmart, two of the largest grocery chains in the country. The REIT is controlled by Toronto-based Slate Group, hence the TSX listing.
The grocery focus makes the REIT relatively more secure than typical retail-oriented REITs, thanks to the stability that grocery businesses (As tenants) offer. The REIT has experienced steady growth over the years.
Between 2014 and 2022, the REIT grew its ownership interest from 41 properties to 117 properties (current portfolio) and net income by over five times.
As a REIT, the primary attraction is its dividends. It has maintained or grown its payouts in the last ten years, and since 2017, its yield has hovered between 7% and 10%. The payout ratios have the tendency to push beyond the 100% mark.
While the yield may seem like the best reason to invest in this REIT, you may also experience a modest capital appreciation over time. The REIT is trading below its target price, and the valuation is not bad.
TerraVest is an industrial company and manufacturer that caters to both commercial and residential customers.
The original forte of the company was developing transportation solutions and vessels for the energy sector, including storage and transportation solutions for ammonia, LPG/NGL, refined fuel, and water.
Now, it has expanded its portfolio to include home heating/residential HVAC solutions.
TerraVest is among the best, most consistently growing small-cap stocks in Canada.
It also pays dividends and has recently grown its payouts by about 25%. Even though the yield is rarely attractive, its dividends have pushed its overall returns quite significantly over the last ten years.
The stock grew by about 800% between Sep 2013 and Sep 2023, and if you add in the dividends, the overall returns become over 1,270% for the period. The growth has slowed down in recent years, but it’s still quite powerful.
The company has rock-solid financials, and even though the revenues jumped quite a bit in 2022, the net income has grown relatively steadily. Insiders own about a quarter of the company, which is significant, to say the least.
You may be hard-pressed to find a reason not to choose Terravest, though it carries a significant amount of debt, and its price-to-book value is high at 3.1 times.
But it’s trading at a healthy Enterprise value-to-sales ratio of 1.4, and the revenues are more than enough to keep its debt in check. The growth is exceptional, and the dividends are the cherry on top.
10. MCAN Mortgage
MCAN Mortgage or, more accurately, MCAN Financials, which is the new name of the company, though the stock is still trading with the old name, is primarily a mortgage and home loan company (including construction loans).
It has diversified its business mix to include wealth management.
MCAN is one of the most compelling dividend stocks in the small-cap dividend pool. It returned over 180% to its investors in the last decade (Sep 2013 and Sep 2023), and only about 23% of it came from the stock’s growth; the rest was from dividends.
It has all the characteristics of strong blue-chip dividend stocks, starting with the financial sustainability of its payouts.
The payout ratio only pushed through the 100% mark once in the last ten years (2020). Otherwise, it has remained on the safe side, even when the company paid very generous special dividends.
The yield hasn’t fallen below 7% yet and is typically much higher, often reaching double digits. The company has been steadily growing its payouts, though it bears mentioning that it also slashed its payouts once in the past.
You may consider MCAN purely for its dividends, even though it’s a small-cap stock.
Despite its generous yield, the company has managed to keep its dividends financially viable (yet), which may allow it to steadily grow its dividends well into the future. However, as a mortgage company, it’s vulnerable to a housing bubble burst.
11. Automotive Properties REIT
Automotive Properties REIT has an extensive portfolio of commercial properties that it primarily leases out to car dealerships.
Its current portfolio contains about 77 properties, about 80% of them in the six largest urban markets (VECTOM) in Canada. This gives its tenants more population exposure, and the REIT experiences decent portfolio value growth.
Its lead tenants include two of the largest dealership chains in the country (Dilwari and AutoCanada) and an EV giant – Tesla, which represents the next major shift in the automotive industry.
This REIT is a strong pick for its dividends, which are typically available at a generous yield (6% to 7%) and healthy payout ratios.
The financial sustainability of the dividends is anchored in more than just its payout history. It has a weighted average lease term of over ten years and enjoys a 100% occupancy rate.
Over 94% of its debt is fixed rate (predictable), which augments its financial sustainability. The REIT has also grown its Funds From Operations (FFO) by over 5.7 times between 2015 and 2022.
You may consider buying this REIT for its dividends alone, though it may be well-positioned for growth as well.
There are a few stocks that are strong candidates for the best small-cap Canadian stocks.
- Global Water Resources (GWR): Decent growth stock, stable business.
- Canoe Income Fund (EIT.UN): Diversified high-yield growth fund.
- NanoXplore (GRA): Graphene company, proprietary tech, can be a powerful growth project if its market explodes.
- Fiera Capital (FSX): High-yield asset management firm
- Nexus REIT (NXR.UN): Previously a high-yield stock.
- Sangoma Technologies (STC): Stable and powerful growth stock
- BTB REIT (BTB.UN): High-yield commercial REIT
- Inovalis REIT: European office portfolio. High-yield REIT.
- GreenPower Motor Company: Decent growth potential when large EV vehicles (buses and cargo trucks) take off.
Small-Cap Growth Stocks vs. Small-Cap Dividend Stocks
Many investors need to understand that market capitalization, especially in new companies, often corresponds to the growth phase the company is in. In the early days, the company usually has a lower market capitalization than when it reaches saturation point/maturity.
But that’s not always the case. Many small-cap stocks represent fully mature companies in relatively niche markets that don’t support enough growth to push the company into mid-cap or higher. So always identify which is which before disregarding a growth stock with decent potential simply because it’s small-cap.
When it comes to dividends, people tend to distrust small-cap stocks even more. Again, it should be taken into contrast against the company’s financials and maturity.
If it’s a mature, healthy business with consistent financials and sustainable dividends, the market capitalization shouldn’t prevent you from investing in a decent small-cap dividend stock.
Simply put, while market capitalization is something important that you should look into before making an investment decision, it’s not the only thing you should look at. Consider it against the backdrop of the company’s financials, age, business prospects, growth potential, and other important factors and metrics.
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Keep your investment goals in mind when researching for the best small-cap Canadian stocks, and buy what’s fundamentally strong and fits your investment goals/strategies.