2 TSX Small-Cap Stocks With Huge Upside Potential

Put your money in these TSX small-cap stocks for long-term growth.

| More on:
Upwards momentum

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Investing in small-cap stocks can fetch you huge returns over the long term. However, small-cap stocks are riskier. So, for the investors who have an appetite for risk, here are my top two small-cap TSX stocks that have strong growth potential.

Park Lawn

Park Lawn (TSX:PLC) stock has jumped more than 28% since I recommended it first on May 13. Despite the strong rebound in Park Lawn stock, it is still down about 16% this year and has further room for growth in coming quarters.

Park Lawn stock is the casualty of the broader market selloff. However, investors should note that the COVID-19 outbreak or economic situations can barely impact its business. The company offers funeral and cremation services with strong competitive advantages that continue to drive its financials.

Park Lawn’s top and bottom line have grown at a robust pace over the past several years, thanks to the sustained momentum in its underlying business. Its revenues and adjusted EBITDA have grown at a CAGR of over 60% in the last five years. Besides, its adjusted net earnings have increased at a CAGR of over 65% during the same period.

The ageing North American population, high barriers to entry, the company’s presence in markets with high cremation rate, and an increase in the number of cemeteries and funeral home assets act as long-term tailwinds for Park Lawn.

Park Lawn’s focus on streamlining costs, operational efficiencies, shift toward high-margin businesses, and strategic acquisitions should enhance its margins in the long run.

Park Lawn’s ability to stay ahead of the competition, defend and expand its market share through acquisitions and organic growth, and operational efficiencies provide a platform for strong upside in its stock over the long term. Also, Park Lawn stock offers a decent dividend yield of 1.9%.

Transcontinental

Transcontinental (TSX:TCL.A) is another small-cap stock with tremendous upside potential. The stock has underperformed the broader markets so far this year and is down about 15%. The COVID-19 pandemic took a toll on its printing business, which accounts for about 50% of its revenues.

Transcontinental provides packaging products and printing services. The company’s packaging products are used in the food and beverage industry and continue to witness steady demand. Transcontinental’s packaging products business is likely to see strong order uptake, as retailers expand their e-commerce business.

Meanwhile, challenges in its printing business are likely to abate soon, and management projects the segment to continue to post positive cash flows. With the reopening of the economy, the demand for its printing business is likely to return to normal.

Investors should note that Transcontinental stock is highly undervalued and trades at a significant discount when compared to the industry average. Transcontinental stock trades at next 12-month EV-to-EBITDA ratio of 5.4, which is considerably lower than the industry average of 10.9. Meanwhile, it trades at the next 12-month price-to-cash flow ratio of 3.4, as compared to the industry average of 15.5. 

Transcontinental’s strong growth prospects and low valuation make it an attractive long-term investment option. Also, Transcontinental stock offers a solid dividend yield of 6.7%.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool recommends TRANSCONTINENTAL INC A.

More on Dividend Stocks

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

Payday ringed on a calendar
Dividend Stocks

Canadian Dividend Investors: 2 ETFs That Pay Monthly Income With High Yields

Dividend ETFs often pay out monthly distributions compared to dividend stocks.

Read more »

think thought consider
Dividend Stocks

2 Stocks I Own and Will Buy More of if They Fall

Stocks tend to go up in the long run. Therefore, buying a basket of diversified stocks on dips should lead…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

Blue-chip dividend stocks such as Royal Bank of Canada and Manulife Financial pay investors a tasty forward yield.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: 3 Solid Stocks to Earn $355 Every Month

Looking to earn steady passive income? Here are three solid TSX stocks that can help you earn a worry-free passive…

Read more »

Technology
Dividend Stocks

RRSP Investors: 2 Stocks to Buy in August for Dividends and Capital Gains

RRSP investors can still find top TSX dividend stocks trading at cheap prices today for a buy-and-hold portfolio.

Read more »