Canadian small-company stocks are back in the spotlight again, helped by tailwinds in multiple sectors at the same time.
The S&P/TSX Venture Composite Index, a broad-market indicator of domestic microcap securities, surged 51.6 per cent last year versus a 5.6-per-cent gain for the S&P/TSX Composite Index, including dividends.
The venture index continued its climb in January. Resource stocks largely drove past bull markets, but technology, clean-energy, health care, cannabis and even cryptocurrency-related stocks have now joined the party.
Microcap stocks offer potential for multibaggers, but keep in mind that they come with higher risk. These young companies may not be profitable or have revenue yet. Management can stumble or face setbacks. Companies may not raise enough capital to grow, while financings can dilute existing shareholders.
We asked three portfolio managers for their top picks among microcaps with growth potential.
Steven Palmer, president and chief investment officer, AlphaNorth Asset Management Inc.
His fund: AlphaNorth Partners Fund
The pick: Dessert Mountain Energy Corp. (DME-X)
52-week range: 0.14 cents to $2.11 a share
This junior explorer of helium in Arizona is a compelling play because of a global shortage of this gas, which is being used increasingly in the technology sector, Mr. Palmer says. Vancouver-based Dessert Mountain Energy found helium after drilling its first three wells last year. It plans to drill two more wells this spring and build a helium-purification plant to begin production by the fourth quarter of this year, he adds. Most people are familiar with helium in birthday-party balloons, but the gas, which has been increasing in price, is used a lot in the electronics, medical equipment and aerospace industries. A U.S. source for helium is critical because of the uncertainty in relying on countries such as Qatar and Russia that also produce the gas, he says. Risks include potential construction delays and the ability to get financing. He paid 22 cents a share for Dessert Mountain stock.
The pick: Reliq Health Technologies Inc. (RHT-X)
52-week range: 0.20 cents to 0.63 cents a share
This company, which focuses on remote patient monitoring and telemedicine, will benefit from the telehealth trend that has accelerated during the COVID-19 pandemic, Mr. Palmer says. Hamilton-based Reliq Health Technologies, which targets the U.S. market, is expected to break even in the first quarter, he says. Catalysts for the stock will come from new contracts with U.S. health groups. Its shares hit a record high of about $2.50 a piece in 2018, but fell sharply because of issues with revenue reporting when some patients did not get reimbursed from government entities. The company has fixed that issue, hired new employees, moved the head office from Vancouver and plans a Nasdaq listing next year, he says. Risks include potential competition and an inability to get big, new contracts. He bought Reliq stock for about 22.5 cents a share.
Bruce Campbell, president and portfolio manager, StoneCastle Investment Management Inc.
His fund: Purpose Canadian Equity Growth Fund
The pick: Good Natured Products (GDNP-X)
52-week range: 0.09 cents to $1.38 a share
This plant-based packaging company has become an attractive investment after a “transformational acquisition” last year, Mr. Campbell says. Vancouver-based Good Natured Products’ purchase of Shepherd Thermoforming Packaging Inc. is key in providing a much-expanded customer base in addition to cost savings from the merger, he adds. Good Natured Products expects to grow its revenue this year by 50 per cent organically and 50 per cent by new acquisitions. It will also have easier access to capital as it gets bigger, while it also has a strong management team led by its chief executive officer, Paul Antoniadis, who is a former CEO of Best Buy Europe, he adds. A risk is whether the company can integrate future acquisitions successfully. He paid about 57 cents a share for Good Natured Products’ stock.
The pick: Kwesst Micro Systems Inc. (KWE-X)
52-week range: 0.65 cents to $1.84 a share
Kwesst Micro Systems, which has developed a niche in small-scale defence and security systems, will benefit thanks to new orders globally from government and law-enforcement agencies, Mr. Campbell says. The Ottawa-based technology company was formed last fall from a reverse takeover of Foremost Ventures Corp. One of its offerings is an app, which streams real-time awareness and targeting information from any source, including drones, to a soldier’s smart device and weapon. Another is a soldier-portable microdrone missile system to defend against hostile small drones. A key to Kwesst’s story is its management team’s strong defence-industry background, he says. Risks include competition for defence contracts and potential delivery delays as Kwesst also relies on contract manufacturing, he says. Mr. Campbell’s average price for this stock was $1.09 a share.
Robert McWhirter, president and portfolio manager, Selective Asset Management Inc.
The pick: Newlox Gold Ventures Corp. (LUX-CN)
52-week range: 0.03 cents to 0.40 cents
Vancouver-based Newlox Gold Ventures is a unique precious metals company because it recovers gold from tailings left by artisanal miners in Latin America, Mr. McWhirter says. These miners’ method only captures about 40 per cent of gold in the ground, while 60 per cent is thrown into a pile that contains silver, too, he notes. Newlox’s initial venture is in Costa Rica, which has suffered environmental damage from mercury use in gold recovery by artisanal miners. In the second quarter, the processor plans to ramp up gold production from tailings at its first plant and commission a second plant to crush ore to be brought there by miners. A risk is that these miners may not want to participate, but these projects have government support because of environmental concerns. Newlox plans to announce a third plant soon in another country. He paid 22 cents a share for Newlox stock.
The pick: Cielo Waste Solutions Corp. (CMC-CN)
52-week range: 0.005 cents to 0.135 cents
Cielo Waste Solutions is an attractive clean-energy play because it has rights to a technology to turn most garbage, including plastics, into renewable diesel fuel, Mr. McWhirter says. This Red Deer, Alta.-based firm operates a refinery in its province that converts sawdust to biodiesel. This year, it aims to process 1,000 litres an hour of fuel and reduce its sulphur content. Canada requires diesel to include 2 per cent biofuel so there is a significant domestic market. Cielo also has memorandums of understanding to build five joint-venture facilities in Alberta and Nova Scotia and plans for 40 more North American facilities. It’s expected to be cash flow break-even this year, he says. A risk stems from potential hiccups in reducing enough sulphur to get premium pricing for its biofuel. He bought Cielo stock for 6.3 cents a share. The stock traded as high as 30 cents in 2018.