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What are we looking for?

High-quality Canadian small-cap stocks that might have slipped under your radar.

The screen

We screened our Canadian stocks universe using the following criteria:

  • A market capitalization of more than $100-million but less than $1-billion;
  • An economic performance index, or EPI (return on capital divided by cost of capital) greater than 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
  • A positive EPI change over the past 12 and 24 months;
  • A return on capital greater than 8 per cent;
  • A positive return on capital change over the past 12 and 24 months;
  • A positive sales growth over the past 12 and 24 months;
  • A free cash-flow-to-capital ratio of 2 per cent or higher. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good, 5 per cent and above is excellent;
  • A positive six-month price performance.

More about StockPointer

StockPointer is a fundamental analysis tool based on an economic-value-added (EVA) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.

What did we find?

Six companies fit this list of criteria. Tucows Inc., an Internet service provider, comes up as the highest wealth creator of the group. It also has the highest return on capital, at 26 per cent, and the best free-cash-flow-to-capital ratio. The stock had a good run in the past 12 months (up 73 per cent), but has been on a negative trend since early May. It's now sitting close to 21 per cent below its 52-week high. Brick Brewing Co., the Kitchener, Ont.-based brewer, has generated the highest six-month return of the group at 44 per cent. The company successfully launched two new brands in late 2016, which helped increase revenue, and management expects the momentum to stay for fiscal year 2018.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Jean-Didier Lapointe is a financial analyst at Inovestor Inc.

Select TSX-listed small-cap stocks

CompanyTickerMarket Cap. ($ Mil.)EPIEPI Chg. 12MEPI Chg. 24MR/C (%)R/C Chg. 12M (%)R/C Chg. 24M (%)Sales Chg. 12M (%)Sales Chg. 24M (%)FCF/Cap. (%)Price Chg. 6M (%)
Tucows Inc.TC-T714.
Brick Brewing Co. Ltd.BRB-T133.
Newfoundland Capital Corp.NCC.A-T297.
Valener Inc.VNR-T840.
Western Forest Products Inc.WEF-T968.
Cargojet Inc.CJT-T514.

Source: StockPointer