At less than $5, these battered stocks have potential

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The recent stock market selloff has left behind battered names for bargain hunters. And while larger companies get the limelight, it's the riskier, emerging growers that offer investors a multi-bagger opportunity.

Even without market pullbacks, smaller companies often don't trade at full market value because of little or no analyst coverage. Some may not generate much revenue or profit yet, but owning them could offer a chance to get in on the ground floor of a fast-growing firm. Others may even offer a modest dividend.

To help sift through the small-cap bargain bin, we asked three portfolio managers to name favourites that are trading below $5 a share.

Don Walker of Norrep Capital Management Ltd., Calgary

• Company: ADF Group Inc. (DRX-TSX)
• Last close: $2.38 a share
• 52-week range: $1.90 to $2.68 a share

Shares of this maker of heavy steel structures for office towers and other buildings should benefit from a recovery in U.S. non-residential construction, Mr. Walker says. Quebec-based ADF has also been slow to build its order backlog because it wants to avoid filling up with low-margin work in the early stages of a rebound, he noted.

Gross margins, which hover around 10 to 15 per cent, should climb to between 25 and 30 per cent "when things are humming," he said. "We are at the cusp of the market coming back in a big way, and this company trades below tangible book value of around $3 a share. … ADF should trade at a premium to book value when the cycle comes back."

The company's stock also pays a semi-annual dividend of 1 cent per share.

• Company: Inscape Corp. (INQ-TSX)
• Last close: $2.77 a share
• 52-week range: $2.06 to $3.74 a share

Inscape, an Ontario-based furniture maker, is poised to climb as the manufacturer for a recently launched line of high-end office furniture for retailer West Elm, a unit of U.S.-based Williams-Sonoma Inc., and "this new development is why I get excited," Mr. Walker said.

In the past, Inscape's sales struggled even though it won awards at the high-profile NeoCon trade show in Chicago. But Jim Stelter, who took over last year as chief executive officer, has been busy growing Inscape's network of key furniture dealers, he said.

Shares of Inscape, which has no debt and $13-million in cash, trade above tangible book value of a little more than $2 a share, he said. Inscape is an earnings growth story, but it is also a potential takeover target if its relationship with West Elm goes well, Mr. Walker suggested.

David Barr of Penderfund Capital Management Ltd., Vancouver

• Company: TeraGo Inc. (TGO-TSX)
• Last close: $4.80 a share
• 52-week range: $4.41 to $7.65 a share

With the recent acquisition of RackForce Networks Inc., TeraGo has moved more aggressively into the data-centre business from being a provider of Internet connectivity to small- and mid-sized companies. More than 25 per cent of TeraGo's business now comes from data-centre services, Mr. Barr says.

In addition to pressure from recent market volatility, TeraGo's shares had been drifting lower as the Street waited for the company to do an equity offering to fund its growth, he said.

Thornhill, Ont.-based TeraGo did a financing at $5.70 a share in June. The company could eventually be a takeover target, Mr. Barr said. "We think the company trades at a substantial discount to what it is worth – about $10 a share."

• Company: TIO Networks Corp. (TNC-X)
• Last close: $1.15 a share
• 52-week range: 66 cents to $1.30 a share

Shares of this Vancouver-based bill payment processor will benefit from continuing acquisitions, Mr. Barr says. The purchase of U.S.-based Softgate Systems Inc., which requires regulatory approval, has made TIO North America's largest walk-in bill payment network.

TIO, which targets mostly the unbanked U.S. population, allows consumers to pay bills at kiosks or in outlets such as gas stations and pharmacies. TIO also offers online and mobile payment options.

"This is a really interesting growth market," Mr. Barr said. "We think [its stock] is trading at about a 50-per-cent discount to intrinsic value, and is worth at least $2 a share on closing of the Softgate transaction." TIO could be a takeover target, but not for the next four to five years, he suggested.

Steven Palmer of AlphaNorth Asset Management Inc., Toronto

• Company: Sprylogics International Corp. (SPY-X)
• Last close: 44 cents a share
• 52-week range: 18 to 81 cents a share

Sprylogics, a provider of search capability for app developers that will enable them to attract mobile advertising, is at the cusp of earning significant revenue, Mr. Palmer says. This Ontario-based company has just launched its Breaking Sports app, which tracks social-media news, including items about injuries and lineup changes.

The app, which offers real-time alerts to fantasy sports enthusiasts and fans, will draw more ad revenue as the number of users grows. A recent deal with the wagering company Tabcorp Holdings Ltd. to offer a version of the app to the Australian market also provides a minimum five-year revenue guarantee, he noted.

One source of revenue stems from a user making a bet based on an alert. The technology could apply to many sectors beyond sports, Mr. Palmer said.

• Company: Vogogo Inc. (VGO-X)
• Last close: $1.05 a share
• 52-week range: 75 cents to $4.60 a share

This Calgary-based provider of payment processing for the digital currency space is gearing up for revenue growth as it partners with top bitcoin exchanges, Mr. Palmer says. Coinbase, which allows clients to exchange dollars for bitcoins, has just expanded to Canada, while Vogogo also works with Kraken Bitcoin Exchange and Bitstamp Ltd.

Vogogo, which provides risk-management services to these exchanges by verifying customer identification, gets a 1-per-cent fee per transaction. Management expects to process 10 million or more transactions daily within a year, Mr. Palmer said.

Vogogo has experienced management who helped build Neteller PLC, which processed 80 per cent of transactions for the online poker industry before the U.S. government shut down major American poker sites in 2011, Mr. Palmer noted.