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What are we looking for?

Canadian small-cap growth stocks trading at a discount.

Small capitalization stocks have been popular in 2018, in part because of unsteadiness in the markets. Trade-war complications are a factor here since small caps are sheltered to some extent because most do not operate internationally. While the outperformance is most evident in the U.S. market, I thought it would be interesting to identify some strong players within the Canadian small-cap market.

The screen

We screened Canadian small-cap companies by focusing on market performance using the following criteria:

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  • A market capitalization between $250-million and $1-billion;
  • A future-growth-value-to-market-value (FGV/MV) ratio between minus 70 per cent and zero per cent. Since we are looking for discounted stocks, we are searching for a negative FGV/MV, as this translates into an undervalued stock. (This metric represents the proportion of the market value of the company that is made up of future growth expectations, rather than the actual profit generated.) A negative value indicates that the market hasn’t reacted and thus the price has not taken in the improved performance yet.
  • Annual return on capital greater than 5 per cent, reported as of last quarter’s end;
  • Positive 12-month sales change;
  • Positive 12-month stock-price change.

For informational purposes, we have also included dividend yield and share price. Please note that some ratios shown are based on an end-of-quarter reporting and the one-year price change is reported as of last month’s end.

More about Inovestor

Inovestor for Advisors is a research platform application based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.

What we found

We came up with a list of 17 companies (ranked by market cap) from which two companies originating from the industrials sector caught our attention.

The first is Logistec Corp., a provider of marine services and environmental services. Logistec is an interesting finding because not only has it encountered both strong sales growth and 12-month price gains, it also has the highest return on capital of all the companies on our list. This is an important observation as it acts as a confirmation for the stock price and indicates that the fundamentals support this growth as well.

Another attractive opportunity is Terravest Industries Inc., which makes and sells fuel-containment vessels and oil and gas processing equipment. This company stuck out because of the 28-per-cent increase in sales that hasn’t been reflected in the stock price yet. Future growth value further supports this with the stock trading at a 25-per-cent discount as compared with its profit-generating potential. Furthermore, Terravest distributes dividends at a competitive yield of 4.1 per cent.

Readers are encouraged to do further research before investing in any of the stocks listed here.

Noor Hussain is an account executive for Inovestor Inc.

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Select Canadian small caps

CompanyTickerMkt. Cap. ($ Mil.)FGV on MVROCSales (12M Chg.)Recent Price12M Price ChangeDiv. Yield
Equitable Group Inc.EQB-T993-49.9%14.8%10.8%$60.100.1%1.8%
Logistec Corp.LGT-B-T915-17.8%16.4%47.1%$55.0058.1%0.7%
North American Palladium Ltd.PDL-T641-4.5%7.8%89.3%$9.6791.0%n/a
Golden Star Resources Ltd.GSC-T627-10.4%9.1%35.6%$0.895.9%n/a
Teranga Gold Corp.TGZ-T619-50.6%5.4%15.7%$4.4233.6%n/a
Atalaya Mining PLCAYM-T608-27.0%9.4%64.2%$3.67116.6%n/a
Newfoundland Capital Corp.NCC-B-T604-6.9%9.9%0.9%$13.953.5%n/a
Madison Pacific PropertiesMPC-C-T565-9.7%6.2%3.3%$3.241.7%3.3%
GDI Integrated Facility Svcs.GDI-T457-35.3%8.9%7.7%$16.026.0%0.0%
Airboss of America Corp.BOS-T453-4.8%9.8%10.0%$15.2218.3%2.2%
True North Commercial REITTNT-UN-T428-54.2%10.9%41.0%$6.437.6%9.2%
Acadian Timber Corp.AND-T422-6.1%9.9%11.3%$19.815.7%5.7%
Cervus Equipment Corp.CERV-T410-42.5%7.9%10.1%$14.5428.6%2.3%
Conifex Timber Inc.CFF-T351-9.3%6.5%22.0%$5.8088.5%n/a
Genesis Land Dev't Corp.GDC-T292-37.8%9.2%50.9%$3.8810.1%n/a
Terravest Industries Inc.TVK-T271-25.0%8.9%28.0%$9.920.7%4.1%
Pro REITPRV-UN-X253-23.5%8.4%27.2%$2.293.2%9.5%
Group Average(17/2,381)524-24.4%9.4%27.9%$14.4028.2%3.9%

Source: Inovestor

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