3 TSX Small-Cap Stocks That Could Be Tomorrow’s Large Caps

Bet on tomorrow’s winners to generate huge profits in the long run.

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Large market swings following the outbreak of the pandemic provide good reasons why investors should be more cautious. While volatility is imminent, there are investment opportunities in small-cap TSX stocks. These small-cap stocks can easily survive the current crisis and should perform exceptionally well, driving their market caps higher. 

Here are three such TSX small-cap stocks that could be tomorrow’s large caps.

Absolute Software

With a market cap of $548.2 million, Absolute Software (TSX:ABT) stock is my top small-cap pick. The software company has performed pretty strongly amid coronavirus-led crisis and has enough firepower to sustain the momentum in the coming years.

Shares of Absolute Software are up 48.3% year to date, beating the benchmark by a considerable margin. The rally in Absolute Software stock is backed by its consistent financial performance and solid growth prospects. Absolute Software’s steady growth in annual contract value, high customer retention rate, favourable industry trend, and debt-free balance sheet provide a strong foundation for future growth.

Despite the move up in Absolute Software stock, its valuation is still within reach. Absolute Software stock trades at the next 12-month price-to-cash flow ratio of 18.8, which is lower than the industry average of 23.6. Meanwhile, its forward EV-to-Sales ratio stands at 3.4, as compared to the industry average of 3.9.

Park Lawn

Park Lawn (TSX:PLC) has a market cap of about $660 million and has enough growth catalysts that can make this small-cap stock tomorrow’s large-cap. The stock has been a casualty of the recent market selloff. However, economic downturns barely have any impact on its operations.

The company provides funeral and cremation services and continues to post stellar growth in its sales and earnings. The company’s top and bottom line grew over 60% in the last five years, which is exceptional. 

Its competitive cost advantage over peers, ageing population, presence in strategic markets, and acquisitions could continue to support its growth rate. Moreover, its focus on high-margin businesses and cost-cutting measures should help in expanding its profit margins. 

Park Lawn stock has recovered sharply over the last couple of months. However, it is still down about 23% year to date, which presents a good buying opportunity.

Docebo

Docebo (TSX:DCBO) is another TSX stock that has enough growth potential. With a market cap of $833 million, Docebo provides software and solutions to support enterprise learning. The company’s offerings are witnessing stellar demand, reflected through its exceptional financial performance.

Docebo continues to acquire customers at a breakneck pace and produces phenomenal growth in its annual recurring revenues. The company’s recurring revenues have grown at a CAGR of 69% since 2016, which is encouraging. Besides, its customer retention rate is very high.

In the most recent quarter, Docebo’s top line marked 57% growth. Meanwhile, annual recurring revenues increased by 56%. Docebo’s average contract value has nearly tripled since 2016, which is encouraging. The demand for Docebo’s platform and solutions is likely to sustain in the coming years and will continue to drive growth in its average contract value.

The increasing deal size and operational efficiencies are driving Docebo towards profitability, which should further support the upside in its stock. Docebo stock has increased by 72% so far this year, and rally in its stock could continue in the coming quarters.

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.

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