Small-cap investing can be tricky, with greater volatility (on average) than most blue-chip stocks that most Canadians flock to. Though small-cap stocks may seem riskier, they can be sources of greater returns over the long haul, especially for the lesser-known small caps that few pay attention to. Indeed, it’s much easier to grow as a $500 million company than as a $ 500 billion company!
Further, small- and mid-cap stocks tend to trade at a greater discrepancy to its intrinsic value. In essence, Mr. Market isn’t as efficient in pricing smaller-cap stocks at their true worth. This opens up a window of opportunity for venturesome investors who seek to get a bit more bang for their investment buck.
With market volatility returning to Wall Street just in time for the spring, investors may wish to give the neglected small caps a second look while they experience considerable volatility. At the end of the day, small-cap stocks can help give your portfolio a bit of a jolt. But do be mindful of the price you’ll pay and do know that mid-cap stocks can trade at multiples below their intrinsic value range for quite some time. Indeed, investors will need to be incredibly patient with the neglected small caps.
Without further ado, consider the following two Canadian small caps that I’d look to watch going into March 2023. The following smaller-cap stocks are among my favourite names with market caps south of $2.5 billion.
Park Lawn (TSX:PLC) is a deathcare company that’s grown impressively over the years, thanks in part to smart merger and acquisition moves. Over the past year, shares have sagged considerably, now down around 23% over the past year alone. Shares are off just north of 34% from their all-time highs.
Undoubtedly, recessions can weigh heavily on before-need demand. Though Park Lawn is feeling the macro headwinds, it isn’t the only one in the space that’s felt the pressure. Amid the past year of selling pressure, the firm has been making good use of its balance sheet, acquiring firms like Jacoby and Muehlebach, enhancing the firm’s growing portfolio of deathcare assets.
It’s unclear when industry pressures will fade. Regardless, the stock seems undervalued at 26.8 times trailing price to earnings (P/E). Death care may not be an exciting place to invest, but as a provider of necessary services, Park Lawn is a name that will find its footing again as the environment normalizes.
Cargojet (TSX:CJT) is a mid-cap stock that used to be loved by momentum investors. The cargo airline used to be a compelling way to play the rise in e-commerce. Of late, though, digital orders have begun to feel pressure. As a recession weighs, the demand for overnight shipping could continue to take a hit. Regardless, Cargojet remains a top Canadian way to play the e-commerce trend.
The stock has fallen 48% from its peak. At just 7.7 times trailing P/E, CJT stock is close to the cheapest it’s been in many years. With a capable management team and strong longer-term secular tailwinds likely to exist once macro headwinds fade, Cargojet remains a top mid-cap stock to watch.