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.

| More on:

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.

More on Investing

Investing

$1,000 Ready to Deploy? 3 Quality TSX Stocks for Canadian Investors

Amid improving investors sentiments, the following three Canadian stocks offer excellent buying opportunities.

Read more »

Blocks conceptualizing the Registered Retirement Savings Plan
Dividend Stocks

RRSP Investors: 3 Canadian Dividend Stocks to Buy on Dips

These stocks have strong track records of dividend growth and now trade at discounted prices.

Read more »

concept of real estate evaluation
Dividend Stocks

Beyond Real Estate: These TSX Income Generators Could Deliver Superior Passive Income for Canadians

These two TSX dividend stocks could offer Canadian investors a reliable income stream and strong long-term upside, without relying on…

Read more »

Confused person shrugging
Dividend Stocks

Better TSX Dividend Stock to Own: Manulife or Sun Life?

While Sun Life stock has outpaced Manulife in the last two decades, which dividend-paying insurance giant is a good buy…

Read more »

A plant grows from coins.
Energy Stocks

Got $25,000? Turn it Into $200,000 in a TFSA as Canadian Dollar Gains

This energy stock may not have a high dividend, but it certainly has a high rate of growth to look…

Read more »

coins jump into piggy bank
Dividend Stocks

How to Use Your TFSA to Earn $1,057/Year in Tax-Free Income

Investing $5,000 in each of these high-yield dividend stocks can help you earn over $1,057 per year in tax-free income.

Read more »

data analyze research
Tech Stocks

Is BlackBerry (TSX:BB) a Buy in May 2025?

While its recent downturn might not look pretty, it might be the best opportunity to buy BlackBerry (TSX:BB) stock and…

Read more »

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

Where I’d Invest the New $7,000 TFSA Contribution Limit in 2025

If you have $7,000 for the new TFSA contribution increase, here are three stocks I would contemplate adding to the…

Read more »