When investing in stocks, many Canadians lean toward blue chips, but greater rewards can come from names that have little or no analyst coverage.
These stocks are typically those of smaller companies for which the potential returns can come with greater risk. Some are not yet even profitable. Still, they can have the ability to grow faster than larger, mature companies, or provide investors with a nice premium if they are takeover candidates. Some pay a dividend too – a nice perk during roller-coaster markets or until Bay Street pays more attention to them.
We asked three portfolio managers for their top under-the-radar stock picks.
Bruce Campbell, president and portfolio manager at StoneCastle Investment Management Inc.
His fund: Purpose Canadian Equity Growth Fund
The pick: Greenlane Renewables Inc. (GRN-X)
52-week range: 0.145 cents to 85 cents a share
Shares of this provider of biogas upgrading systems will benefit from governments seeking to increase the supply of renewable fuel production and more investors gravitating toward environmentally sustainable investing, Mr. Campbell says. Burnaby, B.C.-based Greenlane offers three technologies to capture methane from sources such as landfills and feedlots and turn it into natural gas destined for pipelines. Renewable natural gas is only a tiny fraction of North America’s gas network, he says, adding that Greenlane’s stock also trades at a cheaper valuation than its larger, Canadian-listed peer Xebec Adsorption Inc. (XBC-X), he adds. Risks include the fact Greenlane is in an emerging sector and will likely raise more capital by issuing additional shares that would dilute shareholders’ ownership stake.
The pick: Exro Technologies Inc. (XRO-CN)
52-week range: 18 cents to 68 cents a share
This Vancouver-based company’s shares are attractive because of its patented technology’s potential to improve the performance of electric motors, Mr. Campbell says. Exro Technologies has proven itself in the electric-bicycle market and is continuing to roll out its technology in bigger vehicles, such as electric snowmobiles, to increase torque and speed, he adds. Sue Ozdemir, a former chief executive officer of General Electric Co.’s small industrial motors division was recruited last fall to become Exro’s CEO. The company, which is starting to generate revenue, will probably have to raise more capital by issuing more stock through a private placement as it did recently at 35 cents a share, he says. A risk is the possible selling pressure after a four-month hold period.
Alex Sasso, CEO and portfolio manager, NCM Asset Management Ltd.
His fund: NCM Norrep Fund
The pick: Hardwoods Distribution Inc. (HDI-T)
52-week range: $10.78 to $ 17.23 a share
Forward annual dividend and yield: 34 cents (2.1 per cent)
Shares of this Langley, B.C.-based supplier of hardwood lumber are appealing because “we think 2020 is going to be a strong earnings growth year,” Mr. Sasso says. Hardwoods Distribution is targeting $1.5-billion in sales by 2023 with growth coming largely from acquisitions. “It’s a fragmented industry.” The company sells building products to the residential and commercial construction sectors in North America. It also has a strong management team and a solid balance sheet, he says. Its stock trades at very inexpensive valuation, while its payout ratio – the percentage of net income paid out in dividends – is only 13 per cent, he adds. Risks stem from customer pressure to lower prices, which could hurt margins, and whether management can integrate acquisitions successfully.
52-week range: $35.17 to $50.38 a unit
Forward annual dividend and yield: $1.32 (2.8 per cent)
Richards Packaging, which is North America’s third-largest distributor of plastic and glass containers, is a compelling investment, but its units are thinly traded, Mr. Sasso says. Insiders have a 26-per-cent stake in the Mississauga-based income fund, while the five largest institutional investors hold another 20 per cent. Richards Packaging has strong organic growth, a solid balance sheet and a sustainable monthly dividend with a 36-per-cent payout ratio, he says. “It hasn’t done a material acquisition in a while, but we think that’s part of the game plan going forward.” Its units trade attractively at about 15 times 2020 earnings, he adds. Risks stem from being able to execute on acquisitions, while an oil-price spike, which seems unlikely in the shorter term, would affect the price of raw materials.
Don Walker, portfolio manager, PenderFund Capital Management Ltd.
His fund: PenderFund Small/Mid Cap Dividend Fund
The pick: PFB Corp. (PFB-T)
52-week range: $9.52 to $13.85 a share
Forward annual dividend and yield: 36 cents (2.8 per cent)
Shares of this Calgary-based insulation-products manufacturer are appealing given its strong order book and record revenue levels, Mr. Walker says. PFB’s insulation has a better thermal rating and is easier to put up than a fibreglass product, he notes. The company, which generates a lot of cash flow, has seen improving margins because the price for styrene – a raw material – has fallen sharply. PFB, which paid a $1-per-share special dividend last November in addition to its quarterly payouts, trades attractively at less than 10 times 2020 earnings, he notes. “PFB is generating significantly more earnings growth at half of the multiple of competitor Owens Corning Inc. (OC-N)” A risk is the cyclicality of the end market because PFB sells to the residential, commercial and industrial sectors.
The pick: Hamilton Thorne Ltd. (HTL-X)
52-week range: 86 cents to $1.50 a share
This Beverly, Mass.-based health-care company, which sells equipment and other products to fertility clinics, is expected to benefit from acquisitions and industry tailwinds, Mr. Walker says. Hamilton Thorne initially sold laser systems for in vitro fertilization (IVF) but has been making strategic acquisitions to sell other related products to the same clients, he says. “The model now has a great degree of recurring revenue.” The IVF market is growing because women are delaying having babies and that can cause complications, he notes. There’s also more funding from governments and companies’ health-care plans for fertility treatments, he adds. Hamilton Thorne is also potential takeover target by private equity, he suggests. A risk stems from the ability to integrate acquisitions successfully.