There’s an enormous disconnect between where small-cap stocks trade at today compared to their intrinsic values, which presents opportunities for investors to buy small but quality companies at a significant discounts for outsized gains.
Biosyent (TSXV:RX) stock fell as much as 38% within the last 12 months. A rebound of about 23% from a low early this month has tightened the stock decline to about 22%.
RX data by YCharts
There’s much to like about Biosyent. First, the healthcare company has a track record of strong returns. Its five-year return on equity is about 34%.
Second, Biosyent’s three-year revenue growth was about 11.8%, which facilitated earnings-per-share growth of 14.5% in the period.
Third, its valuation is attractive. At $7.50 per share as of writing, it trades at a blended price-to-earnings ratio of about 18.4.
Fourth, Biosyent has no debt. At the end of the first quarter, it had more than $13 million of cash and cash and equivalents, up 2.7 times from a few quarters ago! This equates to about $0.93 per share. Essentially, buyers would now be paying a multiple of about 16.2 for the stock.
In fact, insiders find the small-cap stock attractive, too. They started buying the stock again in March and June at stock prices between $6.60 and $8.22 per share. Insider ownership is strong at about 7.1%.
Now the market is just waiting for a catalyst to spark Biosyent’s next leg of growth, such as the company introducing proven drugs from other markets as new drugs to the Canadian market.
In the meantime, Biosyent continues to build a cash hoard from its existing products.
Tidewater Midstream & Infrastructure
Tidewater Midstream & Infrastructure (TSX:TWM) is an oil and gas midstream and infrastructure company. Its integrated operations comprise natural gas processing, NGL extraction, gas storage, crude oil and NGL terminal infrastructure, and marketing to North American markets through transmission pipelines, trucking, and rail systems.
Its three-year revenue growth was nearly 140% per year, which led to a double in the net income. Year over year, its adjusted EBITDA, a cash flow proxy, increased by 12% in the first quarter. On a per-share basis, it increased by about 16%.
Based on its distributable cash flow, the payout ratio in the first quarter was only 20%, which gives a big margin of safety for its dividend.
The stock appears to have some strong support at about $1.25 per share and the stock is trading close to that price currently.
At $1.29 per share as of writing, it offers a yield of 3.1% and upside potential of 62% over the next 12 months based on the average analyst price target.
The market doesn’t really like small-cap stocks right now, which lends opportunities to buy them at substantially cheap prices. Investors may need to patiently wait for three to five years to realize the stocks at much higher prices.