Rising Stars: TSX Small-Cap Stocks to Buy in July 2023

Small cap TSX stocks can have significant upside if you pick them right. Here are three that are rising stars.

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The past few years have been terrible for TSX small cap stocks. When the market crashed in 2022, small caps were some of the quickest to decline and many have yet to recover. Investing in small cap stocks can be full of hazards.

Small cap stocks are smaller companies often with products, services, strategies, or management teams that are untested. The reality is the majority of stocks trading on the TSX Venture Exchange (which is composed of small caps) are terrible investments.

However, there is a minority of incredible businesses with massive growth trajectories. Micro-cap TSX stocks like XPEL have helped some patient investors earn nearly 150 times returns on their investments. If you are looking for some small cap stocks with the potential for big returns, here are the three to look at today.

HPS: Tonnes of growth for a value price

Hammond Power Solutions (TSX:HPS.A) has a market cap of $673 million. While most people haven’t ever heard of this company, it is a leading provider of electricity control, automation, and distribution products. Major trends like data, electric vehicles, near-shoring, and electrification are helping support strong growth.

Over the past three years, it has grown earnings per share by a 51% compounded annual growth rate (CAGR). Strong free cash flow generation has meant it has been able to rapidly pay down debt. It sits with a net cash position right now.

Hammond Power stock has delivered an incredible 295% return in 2023. While that type of forward return is unlikely, this TSX stock should keep rising if it continues to execute. Hammond only trades for 11.5 time earnings, which is modest, even if earnings growth were to moderate.

SYZ: An under-followed TSX tech stock

Sylogist (TSX:SYZ) only has a market cap of $170 million. Chances are likely you have never heard of this provider of software solutions mainly because most of its customers are municipalities, non-profits, and school systems. This was a much larger stock a few years ago, but it pulled back after it significantly cut its dividend.

While that might sound bad, Sylogist has been repositioning as a steady growth business versus a yield-co. It sees ample opportunities to grow both organically and through acquisition. It has taken several quarters to make the transition, but the company has been making good progress.

This is not a straightforward investment, but it has significant turnaround capacity if management can do what it says (so far it has). An investor may need to be patient, but this could have elevated upside if it executes its strategy.

HEO: This TSX stock is riding a huge wave (literally)

A final small-cap TSX stock for your radar is H2O Innovation (TSX:HEO). It has a market cap of $285 million. H2O sells specialized filtration systems, chemicals, and services for the global water industry. It provides everything from filters for desalinization plants to water recycling systems for Tesla to products for the maple evaporation industry.

With the world hitting new heat records, water is becoming one of the scarcest resources and commodities. As a result, the rise in demand for H2O’s products and services is only in the early innings. H2O has nearly quadrupled earnings per share since 2020.

I would not call this stock cheap, especially after it has risen 31% in 2023. However, if it can continue to execute and expand its reach, this company could either be a takeout target or significantly larger in the future.

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 Robin Brown has positions in Xpel. The Motley Fool has positions in and recommends Hammond Power Solutions and Sylogist. The Motley Fool recommends Tesla and Xpel. The Motley Fool has a disclosure policy.

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