Investing in small-cap stocks can be highly profitable, especially in the long term. However, investors should take caution before investing in small-cap companies, as they can be highly volatile. Investors should focus on companies with long runaways for growth and the ability to navigate through the challenging operating environment. While the TSX has several high-quality small-cap stocks, here are my top four picks.
Docebo
With a market cap of $1.58 billion, Docebo (TSX: DCBO) is an attractive small-cap stock worth keeping an eye on. It offers a cloud-based learning platform to enterprises and has been growing rapidly. Despite macro headwinds, Docebo’s ARR (annual recurring revenues) continues to grow at a healthy pace while its key performance metrics remain strong.
For instance, Docebo’s ARR grew at a CAGR (compound annual growth rate) of 66% from 2016 to 2021. Meanwhile, it increased by 40% in Q3 (third quarter) of 2022. Furthermore, its average contract value has grown by four times since 2016. Additionally, Docebo continues to expand its enterprise customer base, while its retention ratio remains high.
Looking ahead, Docebo’s growing customer base, product expansion, land-and-expand strategy, geographic expansion, and strategic acquisitions provide a long runway for growth. This technology stock is trading at a discount, providing a solid entry point for investors.
WELL Health
The selloff in Canadian stocks has eroded the market cap of WELL Health (TSX: WELL). Currently, shares of this omnichannel healthcare services provider command a market cap of approximately $755 million. The fear of a slowdown in its business amid economic reopening weighed on WELL Health stock. Nevertheless, WELL Health continues to deliver solid financials while its stock is trading cheap (now a penny stock), making it a solid long-term bet.
What’s worth highlighting is that WELL Health’s business has remained immune to the macro and geopolitical headwinds in 2022. The company is benefitting from the ongoing momentum in its omnichannel patient visits. Furthermore, its high-margin virtual services businesses are growing rapidly, cushioning its margins.
Management remains upbeat and expects the momentum in its business to sustain. Moreover, strategic acquisitions and expansion of the patient services business in the U.S. augur well for growth.
Absolute Software
With a market cap of $816 million, Absolute Software (TSX: ABST) could be a solid long-term pick. The ongoing digital transformation and increased cybersecurity incidents will likely drive demand for its security products. Further, its growing enterprise customer base, solid ARR growth, and low share price support my bullish outlook.
The secular sector tailwinds, new customer wins, geographical expansion, and cross-selling opportunities provide a solid base for growth. Moreover, strategic acquisitions will accelerate its growth rate and support its stock price.
Payfare
Payfare (TSX: PAY) is another lucrative small-cap (it’s actually a micro-cap stock, given the erosion of its share price) company worth keeping an eye on. This financial technology company provides digital banking and payment solutions to the gig economy workforce.
The company is growing fast, as reflected by the increased active user base. Moreover, it is well positioned to capitalize on the growing demand for ride-sharing and on-demand food delivery. Its partnerships with gig platforms, low customer acquisition cost, recurring revenue streams, and asset-light model provide a solid foundation for long-term growth.
