3 Healthy Small Caps for Extraordinary Returns

It’s easier for small companies to grow their revenues from $1 million to $2 million than it is for big companies to grow their revenues from $1 billion to $2 billion. That’s why small caps can help boost the returns of your portfolio.

Without further ado, here are three healthy small caps for your consideration.

Exco Technologies Limited (TSX:XTC) designs, develops and manufactures dies, moulds, components and assemblies, and consumable equipment for the die-cast, extrusion and automotive industries. It’s an international business with 18 manufacturing locations in 10 countries.

At $12.55 per share, Exco Technologies has a market cap of more than $542 million. Additionally, it has a record of 10 consecutive years of dividend growth at an average rate of 17%, and its payout ratio is below 24%! Since 2010 its payout ratio has ranged from 23-32%.

If you’d invested $10,000 at the beginning of that period, it would have transformed to $34,533 (of which $3,236 were dividends) and the annualized rate of return would have been 12.3%. This outperformed the S&P 500, which had an annualized rate of return of 6.3% in that period.

In the first quarter that ended December 31, 2015, Exco Technologies’s net income was $11.8 million, 22.7% higher than the same quarter in the previous year. It generated $17.15 million from operating activities and used a healthy portion of that to reduce debt ($3.95 million) and pay $2.55 million of dividends.

On top of that, Exco Technologies invested $9.6 million in growing the business. After all that, the company still held cash of $37.58 million at the end of the quarter.

Most importantly, in the medium term it’s expected the company should continue growing at a rate of 25% or higher. So, today’s multiple of 11.1 makes Exco Technologies a bargain.

In fact, Director Brian Robbins thinks it’s a bargain. In June Robbins acquired $594,655 worth of shares at an average cost of $12.26 per share.

American Hotel Income Properties REIT LP (TSX:HOT.UN) is one of the best hotel real estate investment trusts (REITs) you can invest in.

It consists of 80 hotels across 27 states in the U.S. Of its hotels, 45 target the freight-railroad industry and 35 consist of well-known brands such as Hilton and Marriott.

At $10.26 per unit, American Hotel has a market cap of more than $358 million, it has improving fundamentals, and it offers an above-average dividend yield of 8.2%.

From 2013 to 2015 the REIT paid 205% more dividends than the S&P 500. In the same period its funds from operations (FFO) per unit have grown almost 52% from US$0.81 per unit to US$1.23 per unit. Yet its shares have essentially gone nowhere.

Today, it’s discounted on a price-to-FFO basis. Its price-to-book value has gone down from what it was in 2013 (1.71) to today’s 1.11.

Analysts agree that American Hotel is discounted. In March the target price from five analysts ranged from $12 to $13.25 per unit. This indicates that American Hotel has an upside of 17-29%. Who doesn’t want income and price appreciation?

Since the REIT’s distribution can consist of U.S. dividends, holding it in an RRSP would avoid any withholding taxes on the foreign dividends.

American Hotel’s payout ratio of 93.5% in the first quarter indicates the REIT can maintain its 8.2% yield.

In the first quarter, its debt to gross book value was 50% and interest coverage was 3.1 times. Both metrics were stronger than the same quarter in the previous year, in which the debt to gross book value was 52.1% and interest coverage was 2.5 times.

As well, its weighted average loan interest rate was 4.58% with a weighted average loan term to maturity of eight years. That is, the interest rate was 13 basis points lower than what it was in the same quarter the previous year.

Plaza Retail REIT (TSX:PLZ.UN) has a market cap of more than $470 million. It focuses on owning and developing retail properties in eastern Canada and has 298 retail properties across eight provinces.

At $4.81 per unit, Plaza Retail yields 5.4%. In the first quarter, it had a conservative payout ratio of 83.2%.

Investors should also note that Plaza Retail is one of two publicly traded Canadian REITs that has increased its distribution for 13 consecutive years.

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Fool contributor Kay Ng owns shares of EXCO TECH and PLAZA RETAIL REIT.

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