The Top Small-Cap Canadian Stocks to Buy in December 2024
Serious investors know that **small-cap stocks are a must** in any good portfolio. The chance for high returns makes them impossible to overlook.
Various studies prove the best Canadian small-cap stocks tend to outperform larger Canadian stocks over the long term.
There are several reasons for this, including better growth potential, more attractive valuations, momentum potential when investors fall in love with an individual stock, and lower levels of liquidity.
The top Canadian small cap stocks to be buying right now
- Goeasy (TSE:GSY)
- Pollard Banknote (TSE:PBL)
- Automotive Properties REIT (TSE: APR.UN)
- A&W (TSE:AW.UN)
- Illumin Holdings (TSE:ILLM)
Goeasy (TSE:GSY)
Goeasy Ltd. (TSX:GSY) has quietly grown into Canada’s top alternate finance company. It boasts operations nationwide, millions of customers served, and some exceptional long-term growth.
The product that sent Goeasy to the stratosphere is its unsecured loan with a whopping 30%+ interest rate. This may seem excessive to you or me, but it’s a much cheaper loan than what it replaced, the payday loan.
The company has grown its top line from just $67M in 2001 to more than $1B to close out 2022. Analysts expect revenue to exceed $1.5B in 2024.
The bottom line grew even faster, increasing from $0.11 per share to $11.55 per share in the same time period. This might be why Goeasy has returned 22% annually to its shareholders from 2001 through June, 2023.
Analysts expect the torrid growth rate to continue, too, with earnings projected to surpass $16.71 per share in 2024. That right there is the small-cap potential I’ve been talking about.
Management’s ultimate goal is to dominate the non-prime credit market in Canada, a segment the company estimates is worth some $30B annually. Besides its trademark loan, the company offers loans secured by real property and furniture financing.
It also recently got into auto financing and buy-now-pay-later financing as it continues to expand its overall product portfolio.
The company can also sell ancillary products with loans, including layoff insurance and life insurance on secured loans. These can be a lucrative revenue source, but they also attract more scrutiny from regulators because of potential for abuse.
Despite its growth potential, Goeasy’s valuation has historically been cheap. The company trades at just 11 times trailing adjusted earnings at the time of writing, but has traditionally traded in the 12.2-12.5 range.
This likely is because the market is worried about how a potential recession might impact the company. It could prove to be a nice entry point five or ten years from now.
Pollard Banknote (TSE:PBL)
Pollard Banknote (TSX:PBL) manufactures, develops, and sells lottery and charitable gaming products to customers worldwide.
It’s Canada’s largest provider of instant-win scratch tickets. It offers lottery services to various jurisdictions across North America, including most Canadian provinces, Michigan, Maryland, Arizona, and several other states.
Approximately two-thirds of the company’s revenue comes from the United States.
Scratch tickets aren’t a sexy business, but Pollard and its partners are working hard to increase the number of tickets sold and the total revenue generated from ticket sales.
It does this by constantly redesigning tickets and making retail displays more enticing. It’s working, a win for both Pollard and cash-starved governments. Long-term growth has been outstanding. From 2010 to 2022, Pollard grew EBITDA from $18.2M to $80.5M, more than quadrupling profits in 12 years.
The main issue with Pollard right now, and the reason for its drastic decrease in price as of late, has been forward outlook, a hit to earnings, and significant headwinds regarding material costs. Unfortunately, it can’t really increase the price on a $5 scratch ticket to pass through higher input costs.
As prospective investors, however, we’re not concerned with what has happened in the past. Did the market get way too optimistic with Pollard? Absolutely. But we’re looking to see what we are paying today for growth in the future. And in this regard, valuations for Pollard have dipped to the point it’s looking attractive again.
The main issue with Pollard is its limited sources of materials needed to make its scratch tickets. As a result, it is at the mercy of raw material prices which could impact the bottom line over the short term. However, if you’re patient, I think Pollard will return to previous growth levels.
After projecting a lackluster 2023, analysts have double-digit earnings growth expectations for Pollard for the next few years.
Automotive Properties REIT (TSE: APR.UN)
Speaking of industries that are consolidating, Canada’s car dealership sector will experience a significant shift in the next 5-10 years as small independent owners of one or two dealerships sell out to larger interests.
To put this shift into perspective, Canada has over 2,000 car dealerships. In contrast, the largest dealership operator owns less than 100 locations.
The best way to play this trend isn’t to own the dealerships, which are volatile businesses susceptible to the overall economy.
The ideal investment is to load up on Automotive Properties REIT (TSX:APR.UN), which buys the underlying real estate and then leases it back to the operating companies.
Automotive Properties has posted some impressive growth since its 2015 IPO, more than doubling the size of its portfolio to over 76 different properties, spanning more than 2.5M square feet of gross leasable space.
It has also successfully diversified away from Dilawri, its primary tenant, who was responsible for 100% of its rent when the company first appeared on the TSX. Many larger dealership operators are tapping Automotive Properties to buy some of their underlying real estate. This frees up cash that is then used to buy other dealerships.
It’s a win-win for both parties. These operators then sign long-term leases of a decade (or longer), giving investors fantastic rent stability. And these long-term leases usually come with some sort of inflation protection, ensuring rents will steadily increase over time.
Usually, a small-cap stock growing as fast as Automotive Properties doesn’t offer much of a dividend. All spare cash is invested back into growth. This company is a true outlier, offering investors a yield in the high-6% range.
Remember, this is a REIT, so it doesn’t necessarily have the explosive potential that a stock does, as it has to give most of its profits back to shareholders.
A&W (TSE:AW.UN)
A&W Revenue Royalties Income Fund (TSX:AW.UN) owns the trademarks for Canada’s second-largest burger chain, trailing only McDonald’s. The chain has more than 1000 restaurants from coast to coast.
Although royalty companies like A&W are generally yield plays – since the company’s compensation for owning the trademarks is first dibs at the royalties paid on sales – A&W has followed a timeless method to generate substantial capital gains as well.
It focuses on serving delicious food made from the best ingredients to customers willing to pay more for quality. The strategy has worked. AW has turned a $10,000 initial investment into something north of $22,000 over the last ten years, including dividends.
A&W also has a history of using innovative promotions to drive the top line. Think of things like its Beyond Meat burger, grass-fed beef, or hormone-free chicken. Even if you disagree with the strategies utilized by A&W, it’s hard to deny that it’s working very well.
The company is also a relatively strong inflation play, as its royalty model doesn’t expose it to the costs of running the restaurant.
Steady same-store sales growth and further expansion of the chain’s restaurant footprint have helped A&W deliver consistent dividend increases. It was unfortunate that when this company hit Dividend Aristocrat status, the pandemic hit and caused it to slash its distribution.
However, please make no mistake about it; A&W quickly made up for lost distributions and then some. Shortly after the pandemic, it issued special distributions and consecutive raises to return to its pre-pandemic distribution. In fact, it has now surpassed 2019’s distribution level.
A&W will likely return to Aristocrat status in half a decade. The stock has a current yield of nearly 6%, an excellent payout compared to its long-term growth potential. Plus, as a bonus, it pays out monthly.
Illumin Holdings (TSE:ILLM)
Until June, 2023, Illumin Holdings (TSX:ILLM) was known as AcuityAds, and it traded on the TSX under the ticker symbol AT. The company had a huge run-up in January, 2021, with shares hitting $30 each, before falling significantly back to today’s levels of approximately $2 each.
This pricing was most definitely an anomaly, which tend to happen more often with small-cap stocks.
It is doubtful those price points will get touched again in the near future. We need to separate ourselves from the fact that this Canadian small cap got that high at one point to avoid unrealistic expectations.
Illumin’s business includes providing targeted digital media solutions that enable advertisers to connect with their audience across online display, video, social and mobile campaigns.
Its solutions include Illumin, its marketing platform; Attention Advertising; and Audience Solutions. The company generates the majority of its revenue in the United States.
The company’s Illumin platform is expected to be a game changer; for the most part, it has been. It is estimated that $82B of capital is wasted in the ad industry due to poor targeting and optimization. Illumin looks to eliminate this, and advertisers will flock to the platform if it can.
The company has gone through some significant headwinds over the last year. Because a lot of its revenue is generated by hospitality, travel, and automobile companies, cutbacks due to the pandemic and supply chain issues were severe. Fears of a recession have also hit the advertising business.
It is expected to return to double-digit growth in 2024 as the pandemic subsides. If a recession can be avoided, I’d imagine these estimates will be revised upwards.
Keep in mind, Illumin has been historically profitable. This is a rarity for a company in the early stages of growth. It has also recently completed a buyback of more than 8% of its outstanding shares and voluntarily delisted from the NASDAQ to save money.
What exactly is a small-cap stock?
You’ll often hear the term small-cap thrown around loosely. Many investors will refer to stocks as small caps when they aren’t.
The true definition of small-cap companies is ones that have a market capitalization of $300M to $2B. A company with a market cap of less than $300M is technically a micro-cap company. Compare this to large-cap stocks, which can have market caps of over $1 trillion.
Another common misconception is that small-cap stocks must trade on smaller exchanges like the TSX Venture Exchange. In reality, many small-cap Canadian stocks, including every single one we discuss below, trade on Canada’s primary index, the Toronto Stock Exchange.
Plenty of small-cap stocks are trading south on the New York Stock Exchange as well. Suppose you’re new and just learning how to buy stocks. In that case, the secret to crushing the overall stock market using small-cap stocks is identifying companies with significant potential that many other investors haven’t identified.
Since large-caps are followed by more people, it’s unlikely you’ll find that edge in larger companies.
Small-time investors like you and me can quickly build up a significant position in the company and then wait until institutional investors discover the name. That’s when the real magic starts to happen.
However, they do require more patience in a volatile market. Canadians must understand that small caps are not for those who have low-risk tolerances. They can have large swings in price, and Wall Street can be pretty vicious during times of uncertainty.
If you’re still interested, let’s take a closer look at seven of the best Canadian small-cap stocks, the kinds of companies that can put a real jolt into your portfolio.