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Cambridge, Ont.-based ATS Automation Tooling Systems will benefit from the reshoring of supply chains and companies increasing automation to reduce costs. Spheral Solar Power - PhotographsUnspecified

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Smaller-capitalization stocks have taken a beating amid inflation and recession fears, but there is a silver lining.

In times of slowing growth, these companies’ shares sell off faster than their large-cap cousins because small companies are more sensitive to changes in the economy.

On the other hand, these stocks usually outpace large caps in an economic recovery. Most recently, that occurred in 2020. It’s not clear when the same trend will occur again, but there are buying opportunities now for long-term investors.

Globe Advisor asked three portfolio managers for their top picks.

Dongwei Ye, vice-president and portfolio manager, North American equities team, Mackenzie Investments

Her fund: Mackenzie Canadian Small Cap Value

The pick: Hardwoods Distribution Inc. HDI-T

Hardwoods Distribution’s shares have fallen sharply this year but are attractive for a company that’s now more diversified and economically resilient than during the 2008 housing downturn, Ms. Ye says.

The Langley, B.C.-based distributor of architectural building products in North America gets 80 per cent of sales from the U.S. It’s a well-run company whose management has gone through many economic cycles, she adds.

Through acquisitions, it has diversified from commodity-type products, such as plywood and hardwood, to more high-value-added offerings, such as doors and trims. Commodity woods make up 29 per cent of sales versus 80 per cent in 2008. Hardwood gets 45 per cent of its business from the new home market, 40 per cent from renovation and repairs and 15 per cent from the commercial space.

Hardwoods Distribution trades at a trough valuation of about 4 times 2023 earnings, and 5.7 times enterprise value to 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA), she says. “I don’t see a lot of downside risk from here.”

The pick: Calian Group Ltd. CGY-T

Calian is a compelling, under-the-radar technology play with four businesses that have good earnings visibility and are recession-resilient, Ms. Ye says.

The Ottawa-based company’s services focus on advanced technologies (ground-based satellite systems); information technology; health care and learning and training. These businesses are linked in that government defence departments globally are big customers.

Calian’s order backlog stood at more than $1.3-billion at June 30. The company, which has a history of profitable growth, has $30-million in net cash and also unused debt capacity for future acquisitions, she says. Defence-spending cuts are a risk but that’s currently off the table.

The company’s shares pulled back after it lowered revenue guidance for fiscal 2022, but that’s not a reflection of its long-term growth story, she says. Its stock, which trades at 14 times 2023 earnings and about 8 times enterprise value to 2023 EBITDA, has a catalyst for growth from potentially better margins and acquisitions.

Sajan Bedi, vice-president and portfolio manager, Canoe Financial LP

His fund: Canoe Canadian Small Mid Cap Portfolio Class

The pick: Andlauer Healthcare Group Inc. AND-T

Shares of Andlauer – a provider of logistics and transportation services to the health care sector – are compelling because of the company’s strong growth potential due to high barriers in entering its market, Mr. Bedi says.

The Vaughan, Ont.-based firm transports drugs and other health care products from customers, such as major pharmaceutical companies, to its warehouses before delivering them to retail outlets. It is in a highly regulated industry.

Andlauer can generate 25-per-cent EBITDA margins because it has pricing power, he adds. The company, which benefits from an aging population’s demand for health care products, has also begun making acquisitions in the U.S.

Its stock trades at 13 times 2023 EBITDA, which is reasonable given that it has little cyclicality, low leverage, and a long runway for growth, he says. A risk stems from executing on acquisitions and navigating the U.S. regulatory environment.

The pick: ATS Automation Tooling Systems Inc. ATA-T

ATS, which designs and builds automated manufacturing systems, will benefit from the reshoring of supply chains and companies increasing automation to reduce costs, Mr. Bedi says.

Andrew Hider, who became chief executive officer in 2017, has transformed the Cambridge, Ont.-based business so that it has become less cyclical, and “should be a lot more resilient through this [economic] downturn,” Mr. Bedi adds.

Life sciences and the food and beverage markets make up 70 per cent of revenue versus 42 per cent in 2016. ATS’s transportation segment is also focusing more on the rapidly growing electric-vehicle trend versus internal combustion vehicles.

Under current management, organic revenue growth has been in the high single-digits while margins have risen to 15.8 per cent from 11 per cent, he says. “It has made some really smart and accretive acquisitions.”

ATS trades at about 12 times 2023 EBITDA, and that’s a big discount to its automation peers and high-quality industrial companies, he adds.

Greg Dean, chief executive officer and lead investor, Langdon Equity Partners Ltd.

His funds: Langdon Canadian Smaller Companies Portfolio, Langdon Global Smaller Companies Portfolio

His pick: Uni-Select Inc. UNS-T

Shares of Uni-Select, an automobile parts supplier and automotive-paint distributor, are compelling investments because it is a business turnaround with strong growth prospects under a new leadership team, Mr. Dean says.

The Boucherville, Que.-based firm’s three businesses include Canadian Automotive Group, operator of auto-parts chain Bumper to Bumper; U.K.-based GSF Car Parts and auto-paint distributor FinishMaster.

“FinishMaster is the largest paint distributor in North America with a lot of opportunity to consolidate others,” he says.

Brian McManus, who became chief executive officer last year after an 18-year stint as CEO at Stella-Jones Inc., has taken steps to improve Uni-Select’s balance sheet and has embarked on making acquisitions, he says. Uni-Select recently purchased 13 auto-parts shops in Ontario.

Competition can be a risk, but Uni-Select is among the top three players in each of its business areas and will more likely take market share from smaller players, he adds. “All three businesses are pretty recession-resilient.”

Uni-Select’s stock trades at 16 times forward earnings and 13 times forward free cash flow, he says. “We expect this business to compound its earnings and free cash flow at 10 to 15 per cent over the long term. Acquisitions will be a contributor.”

His pick: Focus Financial Partners Inc. FOCS-Q

Shares of Focus Financial Partners have suffered a sharp pullback this year, but this investor in wealth management firms should start recovering when stock markets rebound, Mr. Dean says.

The New York-based company has been acquiring stakes in mainly U.S. registered investment advisory (RIA) firms since going public in 2018. It operates as a network of partnership firms by buying a 50-per-cent stake in them.

RIAs have a fiduciary obligation to clients and cannot sell internally managed investments.

“RIA’s are the fastest-growing platforms in the U.S. – much faster than broker-dealers and wirehouses,” he says.

“Focus has compounded its revenue by about 25 per cent a year over the past five years,” Mr. Dean adds. “Organic revenue growth will be negative this year due to the steep correction in stock and bond markets, but its overall revenue will still grow 10 to 15 per cent from acquisitions.”

Focus uses leverage, which is affected by rising interest rates, but “the term structure of its debt makes us very comfortable,” he says. Focus shares, he adds, trade cheaply at 7 times forward earnings and 10 times forward free cash flow.

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