1 Canadian Small-Cap Stock That Needs to Be on Your Radar

Enghouse Systems (TSX:ENGH) is a magnificent technology company that small-cap Canadian investors should look to buy on weakness.

| More on:
Choose a path

Image source: Getty Images

Small-cap stocks may be key to outperforming the broader indices over the next decade and beyond. Undoubtedly, many investment legends are skeptical that the stock market can continue its incredible pace through the “Roaring 2020s.” While the markets may stumble along the way en route to modest returns, investors don’t have to settle. Indeed, by picking one’s spots carefully, investors can outpace the broader TSX Index over an extended duration.

Of course, your odds of snagging a bargain are that much greater with a small-cap name. In the world of smaller-cap stocks, the degree of market inefficiency is that much higher. That means the market isn’t nearly as accurate at pricing a stock at close to its true worth or its intrinsic value. On the flip side, smaller-cap stocks, like penny stocks, may be priced above and beyond their true worth, paving the way for disastrous results.

Indeed, the small-cap space is far more volatile and will not be everybody’s cup of tea, especially retirees. In search of greater returns, though, I do believe that younger investors have a lot to gain by considering some of Canada’s up-and-coming small- and mid-caps.

In this piece, we’ll have a closer look at Enghouse Systems (TSX:ENGH), an exceptional high-tech company with a market cap of $3.1 billion at the time of writing.

Enghouse Systems: A tech firm fresh off a nasty 33% decline

Enghouse is an up-and-coming cloud company with a wide range of enterprise software solutions. Shares have fallen under considerable pressure of late, plunging over 33% peak to trough since June 2020 before bouncing back modestly to $56 and change, down just north of 27%.

The company, which has excelled in M&A, hit a major bump in the road. In the second-quarter conference call, management noted “elevated valuations” across the target market. Undoubtedly, valuations have become stretched almost everywhere these days. Just ask Warren Buffett or the managers at some other firms that have remained relatively quiet on the acquisition front of late.

Although investors may grow impatient in this tougher, frothier environment, I think management is worthy of a round of applause for not giving in to pressure to make more deals at potentially sub-optimal prices. As you may know, the act of acquiring in itself doesn’t create value. If the price isn’t right, it’s tough to create any value via synergies.

Solid balance sheet, modest valuation

In any case, the balance sheet remains on solid footing. With a 1.4 times current ratio, the firm is highly liquid, with more than enough flexibility to move when opportunities arise whilst also returning capital to shareholders.

At 32.4 times earnings, 6.4 times sales, and 7.4 times book value, Enghouse seems pricey, but given its proven M&A strategy, I’d argue it’s not nearly as expensive as it should be given its long-term growth trajectory.

In due time, Enghouse’s urge to merge will pick up traction once there’s more value to be had in the space. Until then, investors can hang onto their shares as the dividend looks to grow at an above-average rate over time.

My takeaway? Enghouse is a marvellous small-cap with a great dividend and a modest price tag after the latest drop.

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 Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enghouse Systems Ltd.

More on Investing

Payday ringed on a calendar
Dividend Stocks

How Much to Invest to Get $500 in Dividends Every Month

These three monthly paying dividend stocks could help you earn over $500 monthly in passive income.

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

Canadian bank stocks are rock-solid investments, but one is a no-brainer buy following the recent interest rate cut.

Read more »

online shopping
Investing

Ring! Ring! Serious Yield Calling at These 3 Telecom Stocks

BCE (TSX:BCE) and other high-yield telecoms worth watching as their yields soar further.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

TFSA Maxed Out? Here Are 5 Other Ways to Grow Your Wealth in Canada

Canadians have other options to grow wealth after maxing out their TFSA contribution limits.

Read more »

edit Sale sign, value, discount
Dividend Stocks

2 Bargain Stocks You Can Buy Today and Hold Forever

These two stocks are reliable and trade ultra-cheap, making them among the best TSX stocks to buy now and hold…

Read more »

A man smiles while playing a video game.
Dividend Stocks

RRSP: 2 High-Yield Dividend Stocks to Consider Now

These top TSX dividend stocks offer attractive yields today for RRSP investors.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

Top 3 Dividend Stocks Yielding Over 7% to Buy in June 2024

Are you looking for the best of the best dividend stocks? These three are the ones that belong on your…

Read more »

Online shopping
Tech Stocks

Up 42% from 52-Week Lows, Is Shopify Stock Still a Buy?

Shopify (TSX:SHOP) stock looks like one of Canada's best growth stocks. And right now, it looks like it's on sale,…

Read more »