Small-cap companies have a higher potential for growth than large-caps, which makes them an attractive investment option. As they have a bigger room for growth, investors could expect higher relative returns.
Here we’ll focus on three small-cap TSX stocks that have strong fundamentals, have been delivering strong financial numbers over the past several years, and have the potential to double in the medium term.
Real Matters (TSX:REAL) stock jumped from $4 to $33 in less than two years. The astounding growth in its stock price followed increased demand for its products and services amid a lower interest rate environment.
Real Matters’ sales and earnings recorded strong double-digit growth, reflecting robust demand for mortgage refinancing throughout FY20 due to the low U.S. mortgage interest rates. The company’s consolidated net revenues jumped about 59%, while its adjusted EBITDA and adjusted net earnings soared by 149% and 136%, respectively, in FY20.
Despite the strong financial performance and favourable industry trends, Real Matters stock has retraced nearly 42% from its 52-week high and presents an excellent entry point. It is trading at a forward EV/EBITDA multiple of 12.8 and a P/E ratio of 30.2, both of which are significantly below its historical average.
I believe the stock could double from the current levels, thanks to the long runway for growth ahead. Real Matters stock is expected to benefit from low interest rates and industry-wide underwriting capacity expansion. Besides, a large addressable market and its large blue-chip customer base should further support growth.
Subprime lender, goeasy (TSX:GSY), is a consistent performer and has created significant wealth for its investors. Thanks to its high-growth business, goeasy stock has generated a total shareholder return (includes stock price appreciation and dividends paid) of about 7,452% since 2001, which is incredible.
The company benefits from the large non-prime consumer lending market and its strong competitive positioning. Moreover, its strong credit performance and strong expense management support its profitability.
With improving demand, omnichannel model, and product & geographic expansion, goeasy could continue to deliver strong returns. Meanwhile, goeasy shareholders could continue to benefit from higher dividend payments.
Dye & Durham
Dye & Durham (TSX:DND) is another top stock that could double over the medium term. The company benefits from robust demand for its platform and its ability to expand through acquisitions. The stock has jumped over seven times from its IPO price of $7 and has generated stellar returns.
Dye & Durham’s ability to add new customers, large blue-chip customer base, low churn rate, and accretive acquisitions provide a strong base for outsized growth in the coming years.
The company’s revenues and EBITDA are expected to mark strong double-digit growth, which could continue to support the rally in its stock. Investors could use any pullback in Dye & Durham stock to go long.
Thanks to the strong fundamentals and sectoral tailwinds, these small-cap stocks could continue to generate stellar returns over the coming years. However, investors should take caution, as small-cap stocks also carry higher risk and could be highly volatile.
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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 Real Matters Inc.