Profitably Canadian

Hey there, time traveller!
This article was published 29/03/2025 (217 days ago), so information in it may no longer be current.

‘Buy Canada’ is a popular endeavour in the current trade and political strife with the United States.

Investors, too, can take a patriotic approach to their portfolio. It’s likely most already have a healthy dose of Canada’s largest firms in their portfolio. Yet the Canadian stock universe is surprisingly large, with many lesser known, less widely held names. Some of which are very profitable despite being overlooked by investors.

“We have a lot going on in Canada and we’re more diversified than people think,” says Robin Speciale, a do-it-yourself investor by night and Toronto business analyst by day.

Speciale often interviews and discusses founder-led Canadian small cap publicly traded companies on his well-followed investment blog/vlog Capital Compounders on Substack and YouTube.

These are companies, by the way, whose market capitalization — a valuation calculated by multiplying share price by shares on the market — ranges from a few hundred million dollars up to about $5 billion.

It’s a high-risk, high-reward corner of the market that gets beat up more than large cap companies like Royal Bank of Canada in times of economic upheaval, says Finn McKay, equity analyst with Value Partners in Winnipeg.

“It’s an interesting part of the market because there are fewer eyes on it, but that means you have to do your own research.”

Many small cap companies may have few if any revenues, but among them are “hidden gems,” notes Speciale, also author of the national bestseller Market Masters: Interviews with Canada’s Top Investors ― Proven Investing Strategies You Can Apply.

He speaks from experience. Speciale’s portfolio — which he publishes on his blog — holds a few large, profitable companies that a few years ago were much, much smaller companies.

That includes Shopify Inc., which Speciale bought when it listed for about $3.50 a share in 2017. Today, the world’s leading e-commerce services provider has a market cap of more than $190 billion and a share price exceeding $140.

Its growth illustrates the promise in looking beyond large caps.

Another small cap success story is Boyd Auto Group, North America’s largest provider of auto body repairs. Today, it’s arguably not a small cap company with a market cap exceeding $4 billion. Yet it remains a key holding in Franklin Templeton’s Lipper Award winning (three-year performance) ClearBridge Canadian Small Cap Fund.

“Small cap in Canada is a stock pickers market to be sure,” says Mike Richmond, Calgary-based portfolio manager for the fund. Holding the index — like the S&P/TSX SmallCap Index — is not likely to lead to outperformance of a large cap index.

It’s largely been flat for the last decade. That said, the TSX Composite Index is only up about 16 per cent over that span.

Boyd is a good illustration of how selecting stocks in small caps can pay off for patient investors and outperform the big, broad index, he notes. In the late 2000s, Boyd’s share price was less than $3. Today, it is more than $200, growth fuelled by expansion across the U.S. — a footprint that should help mitigate trade war troubles.

When Franklin Templeton added Boyd to its portfolio, the company had many attractive characteristics. It generated excess cash flow, allocated capital efficiently and was priced below its intrinsic value.

“Those are the three legs to the stool, if you will” in finding good companies with long growth runways that have yet to garner a lot of investors’ attention, he adds.

That said, Canada’s stock market is “full of landmines” especially on the TSX Venture Exchange where many small caps list, says Ryan Irvine, president and chief executive officer of Keystone Financial Independent Equity Advisors in Vancouver.

“If you don’t know what you’re doing, you can get in trouble.”

Keystone is a subscription based research firm that covers Canada’s and the U.S.’s stock markets, including Canadian small caps.

Like many small cap investors, Keystone evaluates securities using a GARP — growth at a reasonable price — approach.

“By ‘reasonable price,’ we need a company to have earnings as just the starting point.”

GARP helps reduce risk when looking for small companies with strong potential for high growth, he adds.

And small caps are the ideal corner of the market to find what Irvine calls “portfolio changing” investments. He points to a recent study by Jenga Partners that found 90 per cent stocks that gained 10x (more than 1,000 per cent) globally between 2012 and 2022 started out with two things: they were small caps and profitable.

Furthermore, current market conditions present an opportunity to buy good small cap stocks on sale. These companies often see their share price fall more than large caps because investors often flee the higher risk space, Irvine adds.

“Generally, in a downturn like we’re seeing now, babies can get thrown out with the bathwater.”

He cites one stock among Keystone’s finds, Cipher Pharmaceuticals, recommended in 2023 when its share price was about $3.90. “It had almost 50 per cent of its market cap in cash, and it was profitable and growing,” he says about the maker of therapies for acne and treating lice, among other medications.

Today, the company’s share price is about $13 — though as of late March it was down about eight per cent year to date.

Finding good companies, however, takes skill. Small cap funds offer a good, risk-adjusted way to get exposure. They too can be great long-term investments.

Mawer’s New Canada Fund is a prime example, launched in 1988. An investment of $10,000 then would be worth more than $790,000 today.

“Often investing is about patience,” says Jeff Mo, portfolio manager of the fund that is now closed to new investors.

“When you buy a portfolio of wealth-creating companies, which is what we’ve done, time is on your side.”

Joel Schlesinger is a Winnipeg-based freelance journalist

joelschles@gmail.com