Small-cap stocks are often viewed as risky. Any news that could affect the companies will probably send the stocks flying to the moon or falling off a cliff. Moreover, few analysts cover them — if at all. However, hidden gems are also more easily found among small caps.
Importantly, investing a percentage of your money in small caps could greatly improve the overall performance of your diversified portfolio.
Here’s an introduction to a couple of small-cap stocks that have beaten the market benchmarks.
Total return level data by YCharts.
Tecsys
Among the more than 100 Canadian Dividend Aristocrats, Tecsys (TSX: TCS) earns a top ranking in terms of total returns. Its 10-year total returns are close to 38% per year. Essentially, it grew investors’ money at a rate of about 24 times in the period, turning a $10,000 investment into approximately $248,997!
Tecsys has increased its dividend for 13 consecutive years with a 10-year dividend-growth rate of 17%. While its three-year dividend-growth rate has dropped, it was still decent at about 10%. Its most recent dividend hike was about 9%, calculated by comparing the trailing 12-month (TTM) dividend to the previous TTM.
Tecsys is a global company that provides solutions to help companies improve their supply chain. In the last 12 months, it increased revenues by 20% to $118 million. Particularly, in the last reported quarter, its recurring revenue climbed 26% and contributed 42% of total revenue versus 40% a year ago. As its recurring revenue grows and makes up a bigger portion of total revenue, it’ll improve the company’s earnings quality.
The dip of +30% from its recent high could be an excellent entry point for long-term investment.
Fronsac REIT
Tecsys doesn’t provide much of a yield. Specifically, its current yield is about 0.6%. To complement Tecsys growth, you might invest in another small-cap name like Fronsac REIT (TSXV:FRO.UN). Fronsac is an income stock with above-average growth potential in the REIT space. It offers a nice yield of about 4% at writing.
Fronsac experienced resilient performance during 2020 when the COVID-19 pandemic spread. It had an occupancy rate of 99% with no lack of growth. In fact, last year, it managed to grow its net operating income by 38%. Furthermore, its funds from operations (FFO) per unit growth of 18% exceeded its cash distribution per unit growth of 15%. And it ended the year with a FFO payout ratio of about 53%, which protects its dividend.
One reason for Fronsac’s exceptional performance was its triple-net and management-free lease business model, which allows it to save tonnes of costs. Additionally, its tenants include grocery stores, gas stations/convenience stores, and quick-service restaurants, which were relatively defensive against economic lockdowns.
The Foolish takeaway
Investing in a single small-cap stock is risky, but there are merits in holding small-cap stocks, which, as a group, have outperformed large caps.
It’s essential to spread the risk around by diversifying across a number of small-cap stocks across different sectors and industries. Your small-cap portfolio can help your diversified portfolio outperform against the market.
Although past returns aren’t indicative of future returns, I have good feelings about these small-cap stocks. After doing your own due diligence, if you still like these stocks, consider allocating an appropriate amount of capital in each.
